Introducing the Value Added Tax (VAT) will lead to higher inflation rates across the GCC, according to financial and investment professionals in the UAE.

This is one of the results of a survey undertaken by the CFA Society Emirates, the association for Chartered Financial Analysts (CFA) in the UAE, to assess the impact of introducing VAT in the region.

As much as 82 per cent of the respondents noted that demand for luxury goods will be affected the most by additional VAT costs followed by cars, then tobacco and real-estate. Meanwhile, CFA professionals saw healthcare as the sector which will be least impacted by the additional VAT costs.

Around 80 per cent of the respondents revealed that they would consider moving abroad if an income tax were to be introduced, since 59 per cent of them revealed that the GCC’s tax-free environment was a key factor in their decision to reside here. On the corporate level, employers will not consider relocating if corporate tax is introduced as per 59 per cent of the respondents, although 41 per cent of them believe otherwise. 

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. Furthermore, CFA members also affirmed that there are various hidden or indirect taxes already in place, highlighting hotel taxes as the most obvious example, followed by road tolls as well as car registration and parking fees.

Amer Khansaheb, president of CFA Society Emirates, commented: “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. 73 per cent of the professionals surveyed stated that consumer goods are more expensive in the GCC than their home country; hence VAT will add an additional burden to consumers, leading to higher prices and resulting in inflation.’’

“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,” he added.

The UAE is expected to generate around Dh10 billion to Dh12 billion as a result of introducing VAT in the first year of its implementation. In this context, 66 per cent of respondents said that the GCC countries will be able to efficiently manage the extra revenues received from VAT. 

-TradeArabia News Service