UAE forecast to see biggest fiscal uplift in GCC from VAT

Introduction of value-added tax will have marginal impact on consumers, says BMI report

The UAE will see the most positive effect of all GCC states from the introduction of value-added tax (VAT) in 2018, according to a report.

The UAE has a much larger consumer base to its economy and is heavily reliant on retail spending, particularly from overseas visitors.

As a result, it is expected to raise 2.1 percent of GDP from the tax, compared to 1.1 percent in Qatar and 2 percent in Kuwait, BMI research said, citing figures from the International Monetary Fund (IMF).

The report noted that Dubai and Abu Dhabi typically attract wealthy visitors, so the impact of the 5 percent VAT on goods and services from 2018 is expected to have a negligible impact on them.

What is more, given the range of exemptions proposed alongside its implementation, most notably for food items, the impact on low-income consumers (of which there is a higher number in Saudi Arabia, Bahrain and Oman than there is in the UAE), the overall impact on consumers will be minimal.

BMI’s report also predicts a minimal inflationary impact from the introduction of VAT across the Gulf.

“Firstly, the 5 percent introduction is small and the array of exemptions means it will hardly affect the major components of each country’s consumer price index basket, most notably food and beverages,” the report said.

“Secondly, while economic growth is picking up (which would result in demand-pull inflation) we are still expecting real GDP growth to remain subdued by historical standards.”

Finally, BMI said its expectation for a continued strong US dollar and interest rate hikes by the Federal Reserve and GCC central banks would keep inflation in check.

The amount of revenue raised and the costs to growth will vary slightly across the GCC, the report said. “But given our expectation for continued fiscal deficits, it is likely that the rate will be raised over the coming years.”

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