VAT is coming to the UAE, and we're here to make sure you understand exactly what that means
Tax; such a small, unassuming word - with the power to strike fear into the hearts of everyone who hears it. But what's the reason behind the madness? Many people loathe the word because they don't understand it - or have never dared try. So we're going to do it for you.
The Tax Procedures Law issued this week laid down the foundation for the planned UAE tax system, regulating the collection of taxes and defining the role of the Federal Tax Authority.
It paves the way for the collection of taxes, mainly VAT, which will be introduced at a rate of 5 per cent on January 1 next year and excise taxes, which will be brought in, in the fourth quarter of this year. The formal tax document plus executive regulations setting out exactly what will be taxable and exempt is expected in the coming months. The UAE introducing VAT (albeit in a very small increment) is a turning point in the country's glory years of completely tax-free living.
But what exactly does it mean for you, the future taxpayer living and buying things here? Let us tell you...
What is VAT?
Value-added tax (known in some countries as goods and services tax, or GST). This is a consumption tax imposed on a product at each stage of production, before the final sale. Take, for instance a computer manufacturer: the company is taxed on all the supplies it purchased to make and produce the computer before it reaches the shelf. Then you, the customer pays the VAT (the tax the company had been liable for during the production process) as a percentage of the total price. VAT is not usually an extra or add-on to the sale price. In the UAE, the tax will be calculated as a percentage of the retail sale price of a product.
What is excise tax?
While commonly referred to as a tax, excise is for all intents and purposes, a levy. It's imposed on the manufacturer, not the customer, during the creation of a product. It often comes in the form of customs duties (if goods needed to produce the product cross a border). But as with VAT, the manufacturer again passes the buck on to the consumer by including it in the product's price. Aside from that, the main differentiating factor that sets excise tax apart from VAT is that it's only imposed on certain goods. In fact, it's sometimes dubbed the "sin tax", because it's generally placed on products deemed 'bad for society' - such as tobacco, alcohol, confectionery, soft drinks and fast food. It explains why those commodities cost so much in other countries (one cigarette in Australia is said to cost around Dh4).
How much more expensive is it going to make living here?
While we don't know any monetary figures, Khalid Al Bustani, the director general of the country’s Federal Tax Authority, told reporters in August the levies may increase overall consumer prices by an average one-off hike of 1.4 per cent.
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