The inflationary impact of value-added tax (VAT) in the UAE has been "modest", with the impact to households mitigated by zero-rated and exempt items, according to a new report from Moody’s Investors Service.
The report said the impact of exemptions and zero-ratings is most visible in sectors such as housing, healthcare and education, while price increases in sectors like transportation were also found to be muted.
According to Moody’s, this is consistent with indicators since the start of the year which show that higher input costs for firms have not been passed through to output costs.
“The implementation of VAT in the UAE also marks a positive step towards revenue diversification,” noted Moody’s analyst Thaddeus Best, who added that VAT could raise up to 1.7 percent of GDP, or $6.5bn (AED 24bn).
Moody’s noted that the federal government will retain 30 percent of the revenue, while the rest will be distributed to the emirates according to a still undefined sharing formula. Moody’s predicts that the sharing formula will likely be based on a still undecided sharing formula.
“The formula will affect the share received by the emirates, with non-oil and population-based approaches more beneficial for Dubai and the northern emirates,” Moody’s said in a statement. “Depending on the structure of the formula, it could potentially have redistributive effects for the less wealthy emirates such as Sharjah. However, this would be an indirect outcome.”
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