UAE finance ministry says VAT will have “small impact” on society

The UAE’s Ministry of Finance has said the introduction of value added tax will have only a “small impact” on society, amid cost of living concerns from some residents.

A survey released on Monday showed nearly half of UAE residents were concerned they could not afford cost of living increases resulting from the 5 per cent tax, introduced on January 1.

Read: Nearly 50% of UAE residents concerned about cost of living

There have also been complaints from some consumers that they are being overcharged following its introduction due to a lack of smaller denomination coins in circulation.

Read: UAE central bank says enough coins in circulation amid overcharging concerns

In a statement to government news agency WAM, the finance ministry said VAT would have a positive impact on the UAE’s development and competitiveness and help build a sustainable knowledge economy,

Ministry of Finance undersecretary Younis Haji al-Khouri said there had been “negative impressions” related to the tax but it had been prepared after 10 years of studies and took into account the country’s future direction.

“The value added tax will contribute to generating additional income for the government of the UAE, which will enable it to upgrade its services and help it continue to develop a future infrastructure that will support the country’s steady progress in global competitiveness indicators and the labour force,” he said.

The official added that the tax would encourage companies to control their operating expenses, create jobs and provide a boost to exempt sectors like health and education.

He suggested that VAT would have a “small impact on members of society depending on their rates and patterns of spending” but a “greater impact on economic and social development” and the development of government services.

The tax will be used to fund government services like hospitals, roads, schools, parks, waste management and police and help the government reduce its dependence on oil and hydrocarbon products, al-Khouri concluded.

On Sunday, the UAE Cabinet announced 70 per cent of VAT revenues would be allocated to local governments to improve local services and spur community development.

Read: UAE to distribute 70% of VAT revenue to local governments

The tax, which is among the first to be introduced in the traditionally levy-free Gulf Cooperation Council, is being applied to most goods and services including food and beverage products, utilities and fuel.

Read: Revealed: Goods and services subject to VAT in the UAE

The UAE’s minister of economy, Sultan Al Mansouri, previously indicated it could generate Dhs12bn ($3.26bn) for the country in its first year and Dhs20bn ($5.4bn) in its second year.