With the U.S. Dollar (USD) continuing a downward spiral that began at the beginning of 2018, you could forgive economists in the UAE for being a little concerned. While the UAE Dirham (AED) maybe intrinsically linked to the USD, however, it has so far benefited from a weaker greenback and increased the competitiveness of exports into Asia and the EU.
The forex trading community has also benefited from a weaker dollar, and this bodes well for the global economy as a whole.
Despite this, it’ fair to say that both economists and investors have been distracted since the beginning of January, as the Gulf Cooperation Council (GCC) finally delivered on its plan to introduce a basic, value-added tax (VAT) on a wide range of goods and services. This represents the end of tax-free spending in the Middle East economy, and in this article we’ll how its impacting on customers and the cost of living in cities like Dubai so far.
When did VAT Come into Play and what Impact has it had?
It was last year when the six Gulf states agreed to impose a 5% VAT rate on customers, applying this universally to non-essential products and a handful of more basic items. The motivation behind such a move was clear; as the GCC looked to create a more regulated and generative economy while boosting its coffers to the tune of $25 billion (Dh91.8 billion) per annum.
Now, while the GCC has decided to universally apply this VAT rate across all non-essential purchases, it has made a number of concessions to aid the transition process for customers and businesses alike. More specifically, products (and services) within the healthcare and education sectors are automatically exempt from the 5% VAT rate, while up to 94 food products and groceries will also avoid an increase in cost.
It’s fair to say that these exemptions have proved crucial, both in terms of helping SMEs to adapt and mitigating any immediate increases to the cost of living. After all, while the majority of auditors and members of the business community welcomed the introduction of VAT within the Gulf States, they also raised concerns about the readiness of SMEs (and particularly food retailers) to meet the GCC ‘s implementation deadline. Fortunately, groceries remain able to sell the majority of their produce tax-free, benefiting both employers and customers in cities such as Dubai.
The Last Word – Will the New VAT Rate Impact on the Cost of Living Over Time?
As a general rule, economists in Dubai and the UAE believe that the introduction of VAT will not have much of an impact on customers, thanks largely to the exemptions that have been put in place on key, essential purchases. Similarly, a basic 5% VAT rate on some food remains relatively low in comparison with other countries, such as the 25% applied in Croatia and the 15% charged in Luxembourg.
This could change, of course, particularly if the rate was to increase over time or the GCC removed many of the exemptions currently applied to grocery products.
For now, however, the implementation of VAT in the six Gulf States has barely impacted on the everyday spending power of consumers, particularly in relatively well-off cities such as Dubai.