How VAT in the UAE Will Ultimately Impact Consumers of Small Businesses

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April 16, 2024

With the announcement of VAT to be implemented in the UAE from 1 January 2018, many small businesses would be worried about the impact this has on their customers. As many Small businesses are running with low margins, increasing prices through VAT may have a detrimental effect on their customers. However, there are other things the small business will need to consider. Firstly, if their customers are businesses whose supply will also be subject to VAT, then they should not need to worry because their customers will be able to claim back the VAT charged to them so long as their revenue exceeds the threshold limit for registration. On the other hand, if customers are not registered for VAT and they are supplying VAT exempt supplies, then the VAT charged to them for supplies will effectively be a 5% increase. It should also be noted that Government entities are to be treated as a VAT registered and so they will have to pay VAT on supplies paid.

The second consideration should be if their customers are end consumers. It is this group of customers who fully bear the effect of VAT, as they cannot claim the VAT back from the government.

Generally, a 5% VAT may be hardly noticed by consumers in the UAE, especially as certain food items, essential medical healthcare, and education will be exempt. Furthermore, although 5% will also be one of the lowest rates of VAT charged among the OECD countries, there are many households and lower-income workers who will feel the pinch.

In the GCC (Gulf Cooperation Council, made up of Saudi Arabia, UAE, Bahrain, Kuwait, Qatar, and Oman) the introduction of VAT reforms were discussed and a feasibility study was conducted in the early 1990s to test the implementation of VAT and corporate taxes. But in the last few years, the impact of low oil prices continues to fuel further state budget deficits which place a greater focus on increasing state revenues via VAT and other taxes.

Looking at this dilemma from an economic perspective, the rate of inflation for the UAE is not expected to increase dramatically as a result of VAT. This is because many items such as financial services, residential rent, school fees, certain food items, and essential healthcare, which form a large portion of the budgets of households, will be exempt or zero-rated. It is the luxury items, services, entertainment, and leisure that will be subject to VAT and many households may choose to limit spending on them.

Small businesses, therefore, rather than worrying about the increased VAT on goods and services should focus now on a pricing strategy coming up to the introduction of VAT. This should also include communicating with customers early to allow them to understand how prices will impact them from 1 January 2018 and beyond.

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