'VAT adoption in the UAE is inevitable'

Dubai Customs announced yesterday that implementing value added tax (VAT) in the UAE and GCC region would have a significant positive impact on strengthening the economy and raising current standard of living.

Abdulrahman Al Saleh, Executive Director of Corporate Support Sector in Dubai Customs, said that the statements of the International Monetary Fund (IMF) about two per cent increase in inflation if VAT is implemented in the UAE and GCC were based on speculation and do not reflect the report's advice on VAT implementation in the UAE.

Al Saleh's comments came after Mohsen Khan, IMF regional director in the Middle East, told media that VAT would result in an increase in the inflation rate by one or two per cent in the UAE and the GCC, to his belief that "implementing VAT now is overwhelmed by many problems, as the service-based economy needs some kinds of multi-sources income."

The IMF report talked about the inflation as result of implementing VAT; however, they have presented it in a positive manner: "In all countries adopting VAT, its impact on retail prices is a source of concern for the politicians and the public. The evidence, however, suggests that there is no reason to expect that VAT would be inflationary, although it may have a one-time effect on the price level and may lead to a change in relative prices".

Consequently, Al Saleh deemed Khan's statements being incompatible with the IMF report, which praised VAT and stressed on the necessity of an immediate implementation to strengthen the UAE economy. "It is well-known globally that implementing VAT in many countries has significantly contributed in boosting economy's sustainability, as VAT is considered the ideal tax for already strong economies.

"While the UAE seeks to strengthen and diversify its economy, the country will not be an exceptional case in this regard", Al Saleh added.

The UAE is likely to introduce VAT in early 2009 to replace the existing customs duty, a senior Dubai Customs official had disclosed to the media earlier.

The UAE has spent two years studying VAT and the infrastructure to levy it will be ready by the last quarter of 2008. It is noteworthy to mention that studies conducted by Dubai Customs indicated that the rise of inflation rate in the Emirates would not exceed a one-year-diminishable half (0.5) per cent when VAT is introduced, mainly because VAT will be a blanket between three and five per cent. Apart from that, VAT is going to replace the customs duties amounting to five per cent, thereby it is expected to support the price levels and mitigate the rise of inflation rate.

These positive consequences are well evident in the majority of 141 world economies who have implemented the VAT system.

IMF reported that: "The evidence from countries that have introduced the VAT suggests that in the majority of cases there was no or only minor increase and in some cases even reduction [for instance Turkey] in the general price level associated with the introduction of VAT, reflecting the fact that in most cases, VAT was intended to replace other taxes."

It added that in most of the cases where there was an immediate increase in prices, VAT contributed less than one per cent point and only in a few cases was the contribution to price increases greater than this.

Source : Emirates Business 24/7 - Dubai, Dubai, United Arab Emirates,  dated 18/05/2008