VAT Impact on UAE Economy

VAT Impact on UAE Economy

VAT Impact on UAE Economy

International Monetary Fund official said, The United Arab Emirates economy is expected to recover gradually next year without suffering a significant blow to growth from the introduction of a 5% value-added tax in January 2018, main concern is that how will it affect the economy of UAE.

UAE is expecting that new year will bring excitement as they are introducing new VAT laws which will change entire functioning of the economy. VAT will have varying impacts on different businesses. It is also expected that the introduction of VAT next month will be a big change for consumers and companies, which have long been accustomed to minimal taxation in the Gulf.

Natalia Tamirisa, IMF mission chief stated that, “We see a gradual recovery for the UAE over the next few years on the back of firming oil prices, a pick-up in global trade, investment for Expo 2020 and easing fiscal consolidation,” she also added that “Non-oil sector growth is projected to rise from 1.9 percent this year to 2.8 percent next year, and to continue climbing to between 3.3 and 3.5 percent in 2020.”

All the SMEs and large corporations are yet to figure out how to inculcate the new tax system in their different business verticals and how it impacts their existing business operations ranging from the financial system to supply chain arrangements to end consumer pricing But Tamirisa said the effect was not likely to be large enough to hurt the economic recovery, and that the government looked set to manage the launch of the tax without disrupting business.

IMF expects the following:

  • UAE’s consolidated fiscal deficit, including the federal government and all seven emirates, to shrink to 1.3 percent of gross domestic product next year and gradually disappear in subsequent years, from 2.2 percent this year and 2.5 percent in 2016.
  • Oil will average over $62 a barrel next year, based on futures prices, compared to an average of about $54 this year.
  • The efficient and sustained implementation of VAT can potentially generate enough revenue in the tunes of 1.5% of the existing national GDP.
  •  Inflation is estimated to rise to 3% in 2018 from 2.2% in 2017, before falling to 2.5% in 2019.

But with great reforms come great implementation hassle. The businesses especially the SME sector is more bewildered with the announcement than the big corporations. Majority of them are yet to research and decide the most optimal way to implement it. There lies the Elephant in the room in the form of cash flow crisis that has not been addressed by either party. Traditionally small businesses rely heavily on Cash Flow, and being penalized for some unfortunate business practice could break the entrepreneurship sentiment of the country, hence it's very important to generate awareness among the business community before rolling out such an economic reform at a mammoth scale.

The ministry has openly demonstrated the seriousness of the new reform by implying heavy penalty at different staged for tax evasion but only in the coming days post the implementation, when the real numbers and data will pour in, the implication and effect could be assessed and debated in length, till then both the consumers and businesses are on the virtue of clarity and implementation of the new tax system.

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