UAE residents cut back ahead of VAT introduction

With the implementation of the new tax drawing nearer, households in the Emirates are preparing for an increase in living costs

Abu Dhabi, United Arab Emirates, November 16, 2017:    Purvi Gokani, partner of the Beautiful Henna Centre in the Al Naser Restaurant Building along Airport Road in Abu Dhabi November 16, 2017. Christopher Pike / The National

Reporter: Jessica Hill
Section: Business
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Purvi Gokani, an Indian entrepreneur in Abu Dhabi, has already made a New Year’s resolution to rein in her spending next year.

Her biggest pledge is to spend less on electronics. “We will be buying as many things as possible at home from India,” says Ms Gokani, who runs Beautiful Henna Centre in the capital.

“We don’t go on many holidays, but we do eat out a lot, and that will also definitely have to change. Savings we should not, and probably will not, cut down on – but it’s not as if we save big amounts anyway.”

Ms Gokani’s saving plans are not part of a personal list of financial resolutions, but something many residents are contemplating ahead of the New Year. Because, while nobody really knows what the future holds, one thing UAE residents do know is that from January 1, when value added tax (VAT) is applied in the UAE for the first time at a rate of 5 per cent, the price of food, petrol, cars, clothes, electronics, water and electricity in the UAE will rise, with a small but inevitable knock-on effect on household spending power.

For some cash-strapped expats, the introduction of VAT is incentive enough to consider moving home.

Lisa Martin, a Dubai accountant who helps SMEs get VAT-ready through her company The Counting House, says there is no need for consumers to panic.

“Being alarmed isn’t going to help. VAT is coming, and there’s nothing that an individual can do about that,” she says. “Thinking about how you might change your spending habits to compensate is far more productive.”

In a poll conducted by the Association of Chartered Certified Accountants and Thomson Reuters in July, 88 per cent of organisations surveyed said they had not made any budget provisions for VAT, indicating that initially, VAT will be almost always be passed down by retailers to the consumer, in 5 per cent price rises on their products.

However, Ms Martin believes that this situation may change over time, “if retailers see spending habits changing, and their profits are being affected by a drop off in sales”. “But that adjustment will take time to come,” she says.

While Ms Gokani is planning to spend her own money carefully, she admits she will most likely pass the cost of VAT onto her customers. “It’s a tough one for SMEs like ours,” she says. “With already rising costs of conducting business, such as higher utility bills, business rents, parking fees, visa fees and insurance costs, it will be a strain paying VAT for the products and services that we use on a daily basis. Ultimately, the consumer will be quite burdened.”

Ms Martin says VAT will have a more noticeable impact on those who already have to manage their money closely.


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“VAT only affects spending, not savings, so those families who spend a higher proportion of their income, versus those being able to put money into savings, will see the biggest proportional effect of VAT,” she says.

“If you are already spending most of your income to meet your monthly commitments, then you may need to cut back in other areas.”

For residents already struggling to balance their budgets, she issues a stark warning.

“The UAE is not a place to get into debt, as an inability to meet your financial commitments is a serious issue. Banks can often be inflexible or unable to allow changes to payment schedules, or provide loans at short notice.”

On top of the new tax, UAE residents looking at their spending projections for 2018 should factor in inflation, which the IMF projects will be an average of 2.9 per cent in 2018 and 2.5 per cent in 2019.

And don’t expect your boss to reward you with a salary increase next year to help you balance your budgets. “Companies will themselves be facing the additional cost of making sure they are VAT compliant, and there is always pressure for businesses to improve their bottom line profitability,” says Ms Martin.

But it is not all bad news. The overall cost impact is likely to be only around 1.5 per cent for most families, according to Ms Martin, given that their biggest outgoings – education, residential rent and overseas travel – will be zero rated or exempt.

There are 160 countries in the world that currently implement VAT, but most of these charge far more than the 5 per cent being introduced in the UAE. The average VAT rate in Europe is 20 per cent, which is about 5 percentage points higher than the global average.

Clementina Kongslund, who runs Nordic Fairyland, an online store in Dubai, comes from Romania, where VAT is 19 per cent; her husband is from Denmark, where VAT is charged at 25 per cent. “Salaries are better here in the UAE than back home, otherwise we wouldn’t stay,” she says. “VAT won’t affect my way of shopping.”

While VAT will affect everyone, lower income residents could be more affected by price rises. Faisal Ashraf is a Bangladeshi, who runs a small air conditioning business in Abu Dhabi, Al Shakline AC, which is already running losses. He believes that VAT will be “a disaster” for his employees, who earn an average salary of Dh1,500 a month.

“They roughly save around Dh900 of that, and the VAT will make their savings very low,” he says. “The men won’t be able to send enough money to their families back home.”

But Kelly Al Muhairi, a Welsh teacher married to a UAE national, is more complacent about changes on the horizon. “Life in the UAE is going to get more expensive, but it will still be cheaper than other countries,” says Ms Al Muhairi, who lives in Mohamed bin Zayed City. She has already started a personal drive to become thriftier with her money.

“I try to plan meals and take a packed lunch to work with me, which I will continue to do so when tax comes in,” she says. “I’m giving travelling to the UK for the winter break a miss this year. And since having children, I’ve cut down my nail salon trips, which are going to get more expensive.”

For some expats, the introduction of VAT is prompting them to consider reducing luxury spending, such as dining out in 2018. “Our lifestyle will have to change in a big way,” says South African housewife Ashleigh Roebuck, who lives in Abu Dhabi. “We’re planning on having more friends over in the garden, which is cheaper than brunch, and only one holiday a year home.”

Brunch is also an easy target for Sally Barnes, a Briton living in Abu Dhabi. “We will definitely reduce going out every Friday for brunch as we normally do; maybe we’ll just go out a maximum of twice a month,” she says.

Some residents say businesses appear to have already begun raising their prices, to cushion the VAT blow to customers come January 1.

Ana Claudia, a Russian beauty entrepreneur in Dubai, says she’s noticed price hikes when doing her grocery shopping.  “I’ve seen the prices rising since last month, for a few products by more than 10 per cent,” she says.

Donna Needs, an American corporate trainer in Dubai, says the introduction of VAT might affect the way she shops for groceries in particular. “I rarely look at prices when grocery shopping, but I might start being more frugal with my groceries,” she says.