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VAT a dilemma
Is an open-minded policy set out by Maktoum bin Hasher - who came to rule in 1894, and is an ancestor of today's ruler of Dubai - about to come to an end?
Sheikh Maktoum did something simple but extraordinary. It was something that, arguably, foreshadowed the booming economy of the UAE today.
He abolished taxes. In the late 19th century, it was ruled that almost half the men who worked in Dubai's pearling industry would not pay a dirham - or rather, back then, an Indian rupee - to the government.
Dubai's population exploded. Wealth from pearling flooded into town, with more people working in the industry than in any other Trucial state, and it didn't even matter that they provided just half the income as those in, say, neighbouring Abu Dhabi. The Persians weren't too happy, needless to say.
But a business model was born, and, a few years later, commercial taxes were abolished altogether.
Fast-forward 100 years. Dubai has a booming population, a healthy if fledgling international business environment, and no taxes. How history repeats itself.
But this could be about to change. The UAE looks set to introduce a value added tax (VAT) on goods. Everyone - from a national to an immigrant worker - will pay a certain amount to the government, probably about 5%, on everything they buy.
A move towards some form of indirect taxation is likely to be replicated in most of the Gulf countries, too.
The IMF's Mohsin Khan said earlier this week that "service driven economies such as Dubai and Qatar will be the first to implement VAT, with Dubai already having made significant progress. Taxation is certainly a politically sensitive subject in the Gulf. However, a sales tax is unlikely to attract as much opposition as an income tax."
So, hopefully at least, Maktoum bin Hasher's legacy will live on in regard to income tax: the introduction of which would severely damage the economy.
However, the introduction of VAT also has the potential to hit the economy hard. Inflation is a serious problem in the region, with the cost of rent and (in Saudi Arabia, especially) certain foodstuffs, soaring. In the UAE, inflation is estimated at above 10%, but is thought to be much higher in booming Dubai.
The evolving tax laws must take this into account. The argument is that the introduction of VAT will not hit inflation because customs duty will be abolished at the same time, as the GCC states enter various free trade agreements with other countries.
According to the UAE's Abdul Rahman Al Saleh - the head of the taskforce studying this issue - back in December, the introduction of VAT won't hit consumers or the economy because of this. He also said that the 15% municipality tax - currently charged on hotel and restaurant bills - will be cancelled when VAT is introduced.
But the GCC governments should consider exempting certain goods - primarily, essentials such as food and clothes - from the new tax. Otherwise the cost of living could soar to damaging levels.
Also, any increase in consumer prices should be carefully controlled. Even if the abolition of customs duty does offset the introduction of VAT, prices have a habit of creeping up when big changes like this are implemented. Witness the introduction of the euro in several countries in the West, which was seen as an opportunity to increase, or at least round up, prices.
As our lively readers' debate on this matter shows, this is an emotive issue in the GCC. Let's make sure that Maktoum bin Hasher's legacy gets a chance to live on - for the continued prosperity of the region as a whole.
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Comments 1-3 of 3
Posted by Haresh Gursahani, Mumbai, India on 21 May 2007 at 14:55 UAE time
If UAE has to maintain the momentum of the boom which it is seeing since last three years or so, then the Govt. has to refrain itself from tickering with the existing set up of NO TAX REGIME, lest it should not have negative effect on the economy which at present is in the over drive mode. In present situation VAT is bound to have a cascading effect as all the new taxes, in the initial stages , when introduced are not understood in the true sense or half understood by the traders & business community & they jack up the prices to the maximum effect, which in the short run have inflationary effects same as the case when VAT was introduced in India.
Posted by Buddhadeb Mookerjee, Dubai, UAE on 17 May 2007 at 15:58 UAE time
Ben Flanagan's article is topical and thought provoking. Maktoum Bin Hasher had the foresight and courage of conviction to take a momentous decision to end the tax regime. His policy has served Dubai extremely well as is evidenced by the spectacular growth achieved by it ever since the tax free regime was introduced. It takes a benevolent ruler and a great visionary to take such a bold step. Let his legacy continue.Otherwise the growth trnd of Dubai would be adversely affected. The recent inflationary trend has already affected saving potential of the residents substantially and introduction of any form of taxation direct or indirect will add fuel to the fire.
Posted by C S Sagoo, Dubai, UK on 17 May 2007 at 11:11 UAE time
The article under the above subject by Ben Flanagan on Wednesday, 16 May 2007 makes sense.
In additition, if VAT is introduced, it will affect the business economy and trade in quite a few ways. Dubai hosts the world famous Dubai Shopping Festival and the Summer Surprises every year. These festivals bring thousands of tourists from all over the world for shopping as they are well aware that prices in Dubai are very competitive and lower than their home countries. The introduction of any VAT and taxation will eliminate this competitive edge and kill the market and the festivals eventually. This ofcourse has a chain reaction and the tourist industry will also suffer. The Authorities need to reconsider any ideas suggested by the Western Experts and free themselves of that influence. Let the Legacy of Maktoum bin Hasher live.