VAT edges a little closer after study

The UAE took a tentative step closer to a value-added tax (VAT) as the Ministry of Finance confirmed that it had completed a study of the levy and its potential impact on the economy. While no decision has yet been made, the very idea of a VAT has already begun to raise concerns among business groups. "We have submitted our report to the Cabinet," the Director General of the Ministry of Finance Younis al Khoori said yesterday. He declined to say when a VAT could be introduced.

A VAT has been mooted by the Government, partly as a strategy to control money supply. Mr al Khoori's comments follow an IMF report last month that said UAE authorities had assured the fund that a VAT could be in place in just two years. The IMF has said the tax could help diversify the Government's revenue base away from oil. Government officials have said that a VAT could be raised or lowered to soak up excess money in the economy, similar to the way central banks use interest rates.

But concerns about the potential effects of the tax have been expressed by a senior official at the Dubai Chamber of Commerce and Industry. "We don't think at this situation, when there's still a lot of challenges, introducing taxes or increasing the cost of doing business will be helpful," the director general of Dubai Chamber of Commerce and Industry, Hamad Buamim, said last week. "We believe there are many other alternatives, other than value-added tax, if the Government would like to collect revenues."

The UAE's tax situation is one of the main attractions for business, but economists argue that a tax system may be necessary as the country cannot rely forever on oil revenues. A VAT is generally levied on goods and services. EU countries, as well as India, Canada and Australia are among those nations with a VAT or similar tax system. As yet no GCC states have introduced such a tax. Future drops in oil revenue could encourage other states in the region to consider a VAT, said John Sfakianakis, the chief economist at Banque Saudi Fransi.

"The main impetus for VAT is to diversify a government's revenue base at a time when revenues from oil have maybe declined," he said. "VAT is based on consumption of goods and services and as consumption is sustainable, the UAE Government expects that VAT may be an option." Mr al Khoori said he was confident that banks had sufficient capital to survive further shocks from the global financial crisis.

Only Dh50 billion (US$13.61bn) out of the Dh70bn facility set up by the Government to support bank liquidity two years ago had been injected into the financial system to date, he said. @Email:[e-mail]