UAE's VAT launch expected to lead to higher inflation rates

Survey of financial and investment execs also says demand for luxury good will be most affected by new tax
UAE's VAT launch expected to lead to higher inflation rates
By Staff writer
Sun 12 Jun 2016 07:34 PM

The introduction of VAT in the UAE by 2018 is likely to lead to higher inflation rates, according to a survey by CFA Society Emirates, the association for financial and investment professionals in the UAE.

With the UAE set to become the first country to introduce VAT, 82 percent of respondents said that this will lead to higher inflation rates.

They added that demand for luxury goods will be affected the most by additional VAT costs followed by cars, then tobacco and real-estate.

CFA professionals forecast that the healthcare sector would be least impacted by the additional VAT costs.

More than half of those surveyed (51 percent) believed that the number of expats living in the region will stay the same once VAT is applied, while 47 percent thought that the number will decrease.

The UAE is expected to generate around AED10-12 billion as a result of introducing VAT in the first year of its implementation.

Another significant finding was that 80 percent of respondents said that they would consider moving abroad if an income tax were to be introduced, since 59 percent of them revealed that the GCC’s tax-free environment was a key factor in their decision to reside here.

On the corporate level, most employers (59 percent) said they will not consider relocating if corporate tax is introduced.  

According to the survey, consumers in the region will have to bear the additional costs VAT will introduce, instead of retailers, as it is ultimately paid by the end consumer.

Amer Khansaheb, president of CFA Society Emirates, said: “CFA professionals see VAT as a paradigm shifting reform in the GCC’s fiscal policy and are unanimous that it will lead to higher inflation.

"Although inflation rates are also heavily influenced by interest rates and economic growth, the immediate effects will pose challenges to both consumers and businesses. The additional costs will only be marginally felt by the day to day consumer, but it will have a bigger effect on higher budget purchases."

He said 73 percent of the professionals surveyed stated that consumer good are already more expensive in the GCC than their home country so VAT will add an additional burden to consumers.

He added: “However, the short-term impact will be offset by the long-term benefit VAT will bring to the regional economies. There is an urgent requirement to diversify government revenues, which are currently still largely dependent on income from oil and gas, and VAT is a measure that will allow more stability given that the outlook for crude prices remains volatile.

"Additionally, VAT would encourage more responsible consumer spending patterns and prices would have to be reduced in order for demand to match this trend; which would eventually lead to a decrease in inflation rates.”

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