VAT in the UAE
For the past few months, the head (Sheikh) of UAE has announced that the country will commence imposing tax on value-added goods starting from January 2018. This kind of tax is called VAT, which is one of many kinds of indirect taxes.
First, Let's define what VAT actually means. VAT is an acronym for value-added tax and is imposed on every value-added goods. The word value-added is, to an extent, self-explanatory but it is more complex than it actually sounds. For every stage in the chain of production, the tax is levied because the same amount of percentage is keep adds on until it is at the distribution stage, where it is actually sold. Therefore, it is obvious that most kinds of food are exempted. Drugs-only those essential ones-are also exempted because they are, along with food, viewed as necessities in our living. Economists refer goods such as food and drugs which are exempted from VAT as zero-rated.
Now, lets have a look at the situation in detail. This introduction to VAT in UAE is a giant step for the country and it is also a step for countries of GCC (Gulf Cooperation Council) because at the 3rd GCC VAT forum, the involved countries have reached to an agreement to unify their VAT rate to 5%. UAE will be the first country to execute it; this means that other countries of GCC will take UAE to assess the advantages and disadvantages of the VAT model and either apply the same or strive to bail out according to the consequence. However, it is most likely that due to political issues, there won't be cases of bailing out.
Moving on, let's try forecasting its consequence on the local economy. I personally think that the introduction to VAT is a brilliant idea although I ,as a resident of UAE, may be worse off because price of goods and services may soar. VAT will allow the government to open up a new revenue stream and this will bring huge success to the economy for many reasons. Let's consider the reliance on imports. Main ports in UAE are known to be very popular among manufacturing companies, as some-like the Free Port-are free and others are relatively cheaper. For manufacturing companies, the chain of production isn't very long but it still has a few stages, meaning that they are imposed a VAT of 5% at every stage. Considering the reliance of imports from manufacturing companies-given that there is a nuclear power plant construction in the UAE-the revenue collected from VAT will be huge.
With the collected revenue, the benefits can trickle down to the local people in a number of ways. They could inject its revenue into building state-owned schools, hospitals, infrastructure, police stations and anything that makes the people feel satisfied and protected. This will have a tremendously positive impact on the economy's growth as people will hold less uncertainty and they will contribute to the economy in many ways such as saving up more of their money in financial institutions. Overall, this will increase the amount of injections in an economy.
However, nothing can be perfectly assured, especially in an economy. As stated, this model, although it has proven to be effective in other countries in boosting an economy, can have deleterious impacts. Despite the efforts of the government trying to inform people about VAT, many people will simply sleep after celebration on the last day of 2017 and wake up shocking to see prices of most of the things at the mall having to rise all of a sudden. Nonetheless, this is an extreme case. The real problem is its collision with their Islam ideologies. Many Muslims, those including influential economists, claim that income tax is the only righteous practice in the practice of Islam and therefore, lead to a constant friction in the economy, causing uncertainty here and there. Well, I want to give my opinion on this as well. I think VAT is also a form of equity if you think about it carefully. You will agree that wealthier people consume more of "cooler" or "unneeded" stuffs than those with less money. You will also agree that "cooler" and "unneeded" stuffs tend to be more value-added and thus more expensive, which means that wealthier people will have to pay with VAT on the top for those goods. Eventually, the VAT can be used to work towards for the less wealthier people and this way, equity, which Islam focuses on, is achieved.
To conclude, the new VAT law is only predicted to be doubtlessly a successful fiscal policy that will make UAE a paradise and recover the loss it has gone through with the unending battle with oil prices.
First, Let's define what VAT actually means. VAT is an acronym for value-added tax and is imposed on every value-added goods. The word value-added is, to an extent, self-explanatory but it is more complex than it actually sounds. For every stage in the chain of production, the tax is levied because the same amount of percentage is keep adds on until it is at the distribution stage, where it is actually sold. Therefore, it is obvious that most kinds of food are exempted. Drugs-only those essential ones-are also exempted because they are, along with food, viewed as necessities in our living. Economists refer goods such as food and drugs which are exempted from VAT as zero-rated.
Now, lets have a look at the situation in detail. This introduction to VAT in UAE is a giant step for the country and it is also a step for countries of GCC (Gulf Cooperation Council) because at the 3rd GCC VAT forum, the involved countries have reached to an agreement to unify their VAT rate to 5%. UAE will be the first country to execute it; this means that other countries of GCC will take UAE to assess the advantages and disadvantages of the VAT model and either apply the same or strive to bail out according to the consequence. However, it is most likely that due to political issues, there won't be cases of bailing out.
Moving on, let's try forecasting its consequence on the local economy. I personally think that the introduction to VAT is a brilliant idea although I ,as a resident of UAE, may be worse off because price of goods and services may soar. VAT will allow the government to open up a new revenue stream and this will bring huge success to the economy for many reasons. Let's consider the reliance on imports. Main ports in UAE are known to be very popular among manufacturing companies, as some-like the Free Port-are free and others are relatively cheaper. For manufacturing companies, the chain of production isn't very long but it still has a few stages, meaning that they are imposed a VAT of 5% at every stage. Considering the reliance of imports from manufacturing companies-given that there is a nuclear power plant construction in the UAE-the revenue collected from VAT will be huge.
With the collected revenue, the benefits can trickle down to the local people in a number of ways. They could inject its revenue into building state-owned schools, hospitals, infrastructure, police stations and anything that makes the people feel satisfied and protected. This will have a tremendously positive impact on the economy's growth as people will hold less uncertainty and they will contribute to the economy in many ways such as saving up more of their money in financial institutions. Overall, this will increase the amount of injections in an economy.
However, nothing can be perfectly assured, especially in an economy. As stated, this model, although it has proven to be effective in other countries in boosting an economy, can have deleterious impacts. Despite the efforts of the government trying to inform people about VAT, many people will simply sleep after celebration on the last day of 2017 and wake up shocking to see prices of most of the things at the mall having to rise all of a sudden. Nonetheless, this is an extreme case. The real problem is its collision with their Islam ideologies. Many Muslims, those including influential economists, claim that income tax is the only righteous practice in the practice of Islam and therefore, lead to a constant friction in the economy, causing uncertainty here and there. Well, I want to give my opinion on this as well. I think VAT is also a form of equity if you think about it carefully. You will agree that wealthier people consume more of "cooler" or "unneeded" stuffs than those with less money. You will also agree that "cooler" and "unneeded" stuffs tend to be more value-added and thus more expensive, which means that wealthier people will have to pay with VAT on the top for those goods. Eventually, the VAT can be used to work towards for the less wealthier people and this way, equity, which Islam focuses on, is achieved.
To conclude, the new VAT law is only predicted to be doubtlessly a successful fiscal policy that will make UAE a paradise and recover the loss it has gone through with the unending battle with oil prices.
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