VAT (Value Added Tax) is a consumption levy imposed on good and services, and is near universal across the world. The UAE and Saudi Arabia are among the first countries in the Gulf to implement the tax, starting 1st January 2018 in UAE.
The introduction of indirect taxes to the Gulf states is a positive move to help diversify the regional economy and boost revenue generation. The change has far-reaching implications for businesses in the region, but the impact in our daily lives will be minimal and it’s an idea that many other countries have already put into practice. With the falling oil price, this new source of revenue will assist in the UAE’s economy and benefit residents. Money earned will be reinvested, leading to the creation of new jobs, new projects and public services.
VAT will be implemented in the UAE from January 2018, and it will be at a rate of five percent. The new tax regime will apply to most goods and services; however, it is the bigger purchases that may feel the brunt, such as cars. That said, luxury products vs general grocery tends to be relatively inelastic and it’s thought that luxury demand will not change much. Middle to low income earners will be protected, we know that around 100 items will be exempt from the tax, essentials such as education, food and healthcare.
With all new regimes there will be some adjustment, and specifically for smaller businesses with basic accounting systems and few formal records. These companies will be seeking recruitment of experts who can advise on their liabilities across the supply chain.
The likelihood is multinational companies have sales personnel here who make the deals, and the invoices go another route (e.g. Contract is between HQ in home country and factory in another). These companies will already be accustomed to taxes across all international trading. So, to reiterate, it is more likely the SME’s that will have to up their game.
For the everyday consumer, I think it will take a relatively short period of time until it becomes the norm. The difference will be as minimal as when choosing between the premium or value brands in our everyday shop. Shop wisely is the answer to avoid feeling additional costs.
According to the Euromonitor International the appliances sector, especially consumer electronics, will be hardest hit by the introduction of VAT. Change requires action, it will be interesting to observe how consumer electronic companies will respond and gain the competitor edge through strategic price positioning.
Written by Rainer Iveson, Head of Consumer at Quest Search and Selection
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