The value added tax was implemented for the first time in France in the '50s and after that more and more countries began to adopt it. In the last few years, the CGS countries have begun considering the introduction of this tax as well. Countries like the UAE, Saudi Arabia, Qatar, Kuwait, Bahrain and Oman are working on a law that will introduce the VAT system.
What is VAT and what will it mean in Dubai?
The value added tax or VAT is an indirect tax applied to sold products and services, which is why it could be regarded as a consumption tax. VAT is considered an indirect tax because it applies to the final consumer that purchases the product or the service VAT was applied to. There will be issues for the companies selling goods or services as they will be the ones collecting the tax and returning it to the government, while for the population of Dubai VAT will mean higher prices for certain categories of goods and services that were not subject to any taxes.
Why is VAT necessary in Dubai?
Introducing VAT came as a suggestion from the International Monetary Fund. The logic behind this recommendation is that the federal government of the UAE has no base income that can be controlled, thus relying on the money coming from payments made in Dubai and Abu Dhabi. Other than that, the UAE is negotiating with the United States, the European Union, Australia and China on free trade treaties that will lead to the disappearance of customs duties thus minimizing the income generated by other countries. As a last reason for the introduction of VAT in Dubai is that the Dirham (the local currency) is very dependable on the US dollar which makes the control of the monetary system very unstable.
What rate would VAT have in Dubai?
It has been speculated ever since 2008 that the VAT in Dubai could have a rate between 2% and 7%. This percentage would cover losses coming from commercial agreements, so the impact on the final consumer should not be that great. It is also said that VAT may be introduced in phases.
In the first stage, the value added tax could be applied to products such as tobacco, appliances and luxury products and, in the second stage, it could be applied to other categories of goods and services. Foods and medical services may be exempt from VAT so that middle and lower classes would not be affected. The free zones may also be exempt from paying VAT, so Dubai will remain an attractive destination for investors.
Currently, VAT is applied in 145 countries at variable rates. In the European Union, the laws state the standard VAT rate must be at least 15%. China has a standard VAT rate of 17%; India implemented the VAT tax system in 2005 and the value added tax was set at an uniform rate of 5%; New Zealand, Australia and Canada call VAT as "Goods and Services Tax" (GST). New Zealand and Australia have a 10% GST, while Canada has a 5% GST.