Even though the 5 per cent tax rate of VAT in UAE is much lower as compared to the tax rates in other countries around the world, it is still going to impact the lives of common citizens, especially the middle-class residents of the country. These people will definitely be affected by the price change of the daily-use items and services.
VAT Impacts on common people
The VAT will effectively increase the cost of basic food items and related services. Many tax professionals believe that the new tax will mostly affect the people having a monthly income of around Dh20,000. Whereas people with monthly income below Dh5,000 are not going to experience much impact as they are already consuming less according to their income level. Since the VAT will mostly affect the cost of food and related items, the highest impact will be on the middle class. It is estimated that somebody spending Dh5,000 currently will have to spend around Dh5,250 after VAT.
It is also being expected that not the entire VAT will be passed on to consumers and some of it might be absorbed by other parties involved in the supply chain process.
Experts also believe that the biggest impact on the cost of living will be because of the VAT on food items. Those people who are spending around Dh5,000 on food will see a major impact in the form of price change. VAT is also applicable on water and electricity bills but it may not have any big effect due to the low tax rate. As for the education, middle-class families will experience an increase in the cost of books, school fees, bus fees and other related things.
The new tax rate will also be applicable on the purchase of regular items, such as clothes, cars, jewelry, cosmetics, etc., which is definitely going to have an impact on the overall cost.
Many of the public services, including public transport, accommodation, school education, and healthcare will be zero-rated under VAT, which is a cause of relaxation. Some other services like rental rates, etc. are also going to be cheaper under VAT, which indicates a positive impact on the cost of living. Therefore, the actual impact of VAT on the general cost of living is still hard to ascertain and can be properly understood only after the launch of the new tax regime.
The impact of VAT will largely depend on whether companies decide to increase the salaries of their employees and by how much.
VAT effects on corporate salaries
In order to compensate the added cost of living, some companies in UAE are considering to adjust the salaries of their employees accordingly. Many professionals working full-time in the UAE based organizations are completely dependent on their salaries and might expect to receive VAT allowance to deal with the increased cost. However, there is no such rule or news released by the government.
Many private companies are, however, reported of planning to give a salary hike to their employees to compensate the impacts of the VAT. The increment might not be given to all employees and will depend on factors, like the current salary of the employee, his/her performance, service duration, etc.
Businesses realize that employees will ask for a salary hike to compensate the new taxes or they might even consider looking for another job that offers a better salary. The companies will have to keep the salaries in pace with the market and according to the cost of living.
One immediate effect of the introduction of VAT in the GCC will be in the form of increased demands for qualified accountants and finance experts, who are also familiar with VAT applications and rules. This is the reason why Indian CAs and tax professionals, who are expert in the VAT and other tax provisions, are being summoned by many UAE organizations.
The UAE is all set to launch the VAT structure with a fixed tax rate of five per cent, from January 1, 2018. The VAT will be applied to specific items and services, while some other supplies will be exempt from tax.