The impact of a value-added tax (VAT) system on consumers in the UAE may vary depending on household incomes and spending behavior, and how much will be levied on goods and services. Considering the purchasing power of residents in the country, a 5 per cent VAT may generally be hardly noticeable, especially if the essential food items are exempted.
Those who love to shop for big-ticket items or upgrade their gadgets and cars more often than others will mainly bear the brunt of tax collection. As long as food essentials remain untaxed, low-income families have nothing to worry much about.
Those who regularly purchase the latest smartphone or upgrade their car are the ones to shoulder a greater portion of the burden.
That said, even a VAT at 5 per cent on a Dh200,000 car would only increase the price by Dh10,000, which if spread over a typical loan tenure of five years, would increase the monthly payments by about Dh170.
However, some businesses in the UAE expressed concern that the collection of VAT would discourage shoppers, including tourists, from opening their wallets.
Given that the bulk of the average monthly spend by families in the UAE is for rents, food, healthcare and education, VAT will not pose any major additional burden for those who are not prone to luxury habits of shopping regularly for high-end goods, spending on latest electronics devices, smart phones, cars, jewellery and watches, eating out and entertainments.
While the impact of tax on property transactions will be limited to the wealthy or those above upper middle-income group, a likely hike in the cost of financial services will hit the common man.
The UAE is among the most preferred shopping destinations in the world with a huge influx of tourists that contribute significantly to the GDP of the country. The biggest attraction, apart from being a world-class city is the tax-free economy for the tourists and the expat residents.
The imposition of VAT will have a huge effect on the buying power of both the residents and tourists. It is well known that most tourists and residents will have to pay duty tax again on certain goods in their country of origin.
To avoid burdening consumers, it would be a good idea to implement VAT in phases and exempt certain consumer goods.
Other companies who also deal with tourists in the UAE expressed the same concern, adding that any tax collected could limit visitors’ spending power.
Any amount gone out of tourists’ pockets is their expense, whether it is in the form of VAT or tax. This will really affect the spending power of visitors who wouldn’t have an option but to buy an alternative product with a lesser price, or postpone the purchase.
By Kinnari Doshi – Partner at N R Doshi & Partners