UAE’s Implementation of VAT will boost its Global Competitiveness Level

The UAE plans to implement a Corporate Tax and Value Added Tax (VAT), which has fueled many discussions on what changes the new taxes will bring to both the residents and the country as a whole.

Some argue the introduction of the new taxes will benefit the country’s economy while others hold a different view.

The basic reason the UAE is planning to introduce new taxes is to compensate on the loss of oil revenue the decline of oil prices has brought. The UAE federal government does not generate profits from the sale of oil since it does not sell nor own oil. Abu Dhabi is the UAE’s largest oil-holder; therefore, the fluctuation of oil prices influences the city’s local revenue and not the entire UAE.

Thus, the revenue the federal government will generate from the new taxes will be additional funds that can be used to invest in the country. Finally, the increased federal funds will benefit the country as a whole expand even further.

Simultaneously, a combined approach from all seven emirates towards enhancing the UAE’s economy is beneficial and can only generate profits, as the total amount the new taxes will yield will be more than each emirate would generate individually. 

Most experts argue that the introduction of the VAT on goods will not influence consumer-spending patterns and demand levels will remain steady. Therefore, the VAT will not influence the economy in a negative manner.

In general, when consumer demand drops, consumer spending also falls, leaving producers with less revenue. The aforementioned theory is based on three assumptions, which do not apply in the UAE’s case.

Firstly, it is generally suggested that consumer spending will decline since they will not afford to purchase the same amounts they did before. However, this is only the case when individuals are unemployed or lose many funds in the stock market or investments. The above case does not apply to the UAE. VAT will be imposed on luxury goods and alcohol, therefore the individuals who already afford these goods will still afford them after the VAT is added.

Secondly, most assume that the VAT will increase the general prices of goods and services and that the consumer will have to pay more to cover the tax. However, sellers want to remain competitive, thus cannot increase prices greatly. Therefore, sellers absorb most of the difference the VAT will bring in order for prices to remain steady.

Thirdly, the standard economy model applies to economies where most of the production is domestic. This does not apply to the UAE because the majority of the production is imported from abroad. For instance, if the demand for luxury cars declines in Germany, car manufacturers will go bankrupt.

In basic terms, the revenue generated from taxes will not be transferred out of the economy. The funds simply transfer from the private to the public sector within the economy. If the government uses this money to empower the government, then introducing the taxes is a bad idea. However, if the tax revenue is consumed to expand the country’s infrastructure and social services, than introducing the taxes is a good idea.

When taking into account that the emirates individual governments continuously invest in their economies, experts are positive that the federal government will use the tax funds to enhance the UAE’s economy and general growth.

Other countries impose high tax rates to aid their economies recover from financial difficulties and obstacles. The UAE intends to implement a low VAT and its economy is one of the steadiest in the world. Thus, it is believed the introduction of the VAT will further enhance the country’s competitive level.