VAT ‘unlikely to curb spending’ in UAE

With Value Added Tax being set at a low 5 per cent and essential items being excluded, retailers and accountants do not believe it will have a major impact on spending.

A LuLu market in Al Barsha, Dubai. Experts say some shops may spread the weight of price increases driven by VAT. Christopher Pike / The National
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DUBAI // The price of items such as cars, televisions and restaurant bills will rise once value-added tax is introduced in the region early next year.

But as the tax will be at a modest 5 per cent, experts say it is unlikely to affect overall spending.

Details about goods and services to be subject to VAT will probably be released over the next few months, and awareness sessions have begun to help understand its implications.

Because VAT is added to the cost of products, shoppers might not immediately notice a rise in prices but many are concerned about how it will affect their families.

“My worry is that my monthly grocery bill should not go up,” said Carla Stephenson, a housewife. “School fees are already expensive and rents have not come down by much so if other prices move up, of course it will affect people.

“I understood that basic food will not be taxed but will cheese, cake, ice creams, juice cost more? That will affect families.”

None of the six GCC nations has published VAT laws. Government announcements clarified that the tax would not affect people with low or middle incomes.

Exceptions would be made for basic food items, health care, essential medicine, education, and the sale or lease of residential property, with about 100 items not subjected to tax.

“It is inevitable prices will increase,” said Justin Whitehouse of consultancy Deloitte Middle East.

“In practice, it is not always the case that prices simply jump by the VAT rate of 5 per cent because retailers may absorb some of the cost and also because not everything is subject to VAT. I expect vehicles, clothing, electronics and hotels to all be subject to VAT at the standard rate.”

David Stevens, of the E Y accountancy company, said: “We would expect overall consumer prices to rise by a modest 2 per cent. This may be split 1 per cent at the commencement and another 1 per cent spread over the first half of 2018.

“For those goods and services subject to the VAT, prices will rise either initially by the full 5 per cent or, in many cases, by 5 per cent but over a period of time as retailers seek to lessen the immediate rise.”

GCC countries are introducing VAT to boost government revenues, which have taken a beating from falling oil prices.

Businesses and retailers have largely been supportive, particularly after the Government said that VAT could generate Dh12 billion in its first year and Dh20bn the year after.

“We don’t see any negative impact on the buying sentiment and on the consumer’s mind because this will not affect essential commodities, where people would get hurt fast,” said V Nandakumar, head of corporate communication at LuLu, which operates 133 hypermarkets and shopping centres in nine countries.

“The VAT proposed is a small amount compared to other countries, so the negative impact will be very minimal.

“Also, with so many nationalities staying here, people are aware of taxation and VAT in some form or the other in their home countries, so people will not be taken aback.

“And long term it will benefit the economy as a whole, which is a good thing for business.”