VAT: 5% is not open to interpretation in the UAE

Consumer complaints about VAT's implementation are a natural part of a new reality - one that should be of benefit to all
71 VAT-related complaints were received by Dubai’s Department of Economic Development (DED) in one day last week
By Bernd Debusmann Jr
Sat 13 Jan 2018 12:43 AM

In the weeks since value-added tax (VAT) was officially implemented in the UAE, questions have swirled about the intricacies of its implementation, with many residents left puzzled about their receipts and asking the question: when is five percent not five percent?

There are, of course, some extreme examples.

Already residents are wondering why, for example, they are paying AED50 to get their car cleaned in January when it cost AED35 in December. Or why a bag of rice has gone from AED19 to AED24. 

It’s unsurprising, then, that 71 VAT-related complaints were received by Dubai’s Department of Economic Development (DED) in one day last week.

Teething troubles

Among the most frequent and more common examples of questions being asked of the tax, a key one is why five percent is sometimes being applied to the total bill – even if some items included are exempt or zero-rated – and what happens in instances in which the price hike seems unjustifiably above the level permitted by law?

“I think these cases are mostly to do with businesses not interpreting the rules in the right way,” says Ton Van Doremalen, DLA Piper’s newly appointed head of tax for the Middle East. “Businesses in the country have a lot to get used to in this environment. It’s a new tax, which for a lot of businesses is a new complication.”

He adds that there are “a lot of practical situations” that must be dealt with and also many instances where there is room for interpretation on the nascent law.

Another minor issue reported by consumers on social media is that the unavailability of small-denomination coins means that the VAT on many small purchases ends up being more than the designated five percent. For example, laundry items that were previously AED1 now cost an extra 25 fils, which, for large swathes of the population, is a big deal over time.

In such cases, Van Doremalen notes, there isn’t much to be done. “It’s like any European country where they abolished one cent coins,” he says.

“I’m not sure there is anything you can do about that.”

A much more significant issue so far, according to Van Doremalen, is that – despite repeated calls to do so – some companies have yet to properly obtain their tax registration number, or TRN. “If you look at the business community, one of the big issues was getting registered in time. While a lot of them have been able to do this, quite a few have not registered in time, or are still in the process of registering now,” he says.

Despite the occasional hiccups – which analysts say was to be expected – it seems unlikely that these issues will have any significant bearing on whether UAE residents decide to remain in the country.

“It helps that renting houses or apartments is exempt, as are school fees. These are the big-ticket items for UAE families – and they are not taxed,” Van Doremalen explains.

Van Voremalen’s views are echoed by Surandar Jesrani, CEO of Morison MJS tax consultancy. “There are those who understand the longer-term benefits of VAT, but in the short and medium-terms there are always challenges. People feel the pinch, as they believe their savings are being impacted.”

Jesrani doesn’t think residents should worry unduly about the longer-term implications, also referencing the absence of rises to housing and education. “People need to be reminded that the level of VAT is the lowest in the world. Inflation won’t go up by five percent. It will go up, perhaps, by three to 3.5 percent initially, based on various studies.”

A spoonful of medicine

Jesrani notes that many of the concerns about VAT can be explained by the “initial psychological change” of having a new tax. “In the longer-term, people will realise there is a good quality of life in this part of the world, and that this requires government spending. At the end of the day, if infrastructure is good, business will be good.”

Van Doremalen and Jerani’s statements are borne out by statistics, with a recent Yallacompare survey (see left) showing that while 45 percent of UAE residents are concerned about the increased living costs associated with VAT, a majority (62.5 percent) expect a salary raise in 2018.

Additionally, many (39 percent) plan to make a big purchase in 2018 – suggesting that most UAE residents see VAT as simply an additional expense to be dealt with in the short term rather than an existential crisis that will severely impact their life.

“The fact that VAT should result in a more stable economy overall has perhaps been lost on many people,” says Yallacompare CFO Jonathan Rawling. “Once the initial shock has worn off, we believe that the other benefits of VAT, such as improved government services and greater business confidence, should be clear to the majority of residents.”

Fortunately for UAE residents who have concerns, the government has taken a proactive approach to addressing complaints about VAT’s implementation. The Ministry of Finance and Federal Tax Authority, for example, has launched an initiative to ensure fair and transparent implementation.

Its focus is on unjustified price hikes and protecting consumers from ‘profiteering’, and it is raising awareness of taxable and exempt products, as well as the requirements for invoices issued by outlets offering taxable services.

“Government entities have been extremely helpful in terms of explaining, as there have been help centres and a lot of information to be found online,” Van Doremalen notes. “I think they’ve done a very good job, but obviously it’s a new tax, and a new environment, so there are a lot of topics that still need to be addressed.”

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Last Updated: Sun 14 Jan 2018 07:17 AM GST

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