Dubai deliberates implementation of VAT
By Natasha Bukhari
Middle East Times
Published February 23, 2006
The International Monetary Fund (IMF) has prescribed it to reduce
the Gulf states' dependence on oil, but economic experts here say that it
will lead to further inflation and negatively affect business. Whatever
the argument, Dubai has taken the first step toward relinquishing its
tax-free status by deliberating means of smoothly introducing value added
tax (VAT).
The long-standing IMF recommendation that
Dubai adopt a taxation system for economic longevity finally saw the light
this week as Dubai customs and the IMF began conducting a study on how to
facilitate smooth implementation of a VAT regime in Gulf Cooperation
Council (GCC) states.
Officials here have said that even if other
Gulf states turn their backs on the idea, Dubai is likely to go ahead with
it. They estimate that implementation of such a plan will take about two
years.
The reason
behind Dubai's enthusiasm is the emirate's eagerness to diversify its
economy and ease dependence on oil, which is subject to many fluctuations
in terms of production and price.
But to do so, Dubai, as with other GCC states,
will need a steady form of income to weather storms, if and when they
occur.
"The
sustainability of the UAE's growth prospects hinges on continued
implementation of structural reforms and maintaining financial stability,"
the IMF said in its last report on the UAE.
The financial expert house advised
"[broadening] the revenue base to reduce reliance on oil and gas revenues,
including introducing a local property tax and a value added tax, the
latter in coordination with other members of the GCC".
Oil makes up
about 6 percent of Dubai's $37 billion GDP.
The IMF, however, warned against "soaring
asset prices and emerging inflationary pressures" that warrant close
monitoring.
Local
economists fear that a VAT system would indeed raise inflation and turn
investors and workers away. The already high cost of living will become
unbearable under further inflation, they say.
"This will fuel further inflation and the
general public will suffer. Employees will demand higher pay to cope with
the added expenditure that will impact overheads, reducing the
bottom-line," says Khalid Maniar, a Dubai-based investment advisor and
economist.
He and
other experts say that if the move were to be inevitable, it should be
part and parcel of a comprehensive package that would include social
security and other privileges for UAE residents.
"In the long run,
the main attraction of living and doing business in a tax-free environment
like Dubai's will disappear," according to Maniar.
In an attempt to
allay fears that the imminent introduction of VAT will exacerbate
inflation, officials said that the move would be carefully studied to
avoid negative repercussions.
"The level [of taxation] will be less than the
current customs duty ... the intention is to compensate for any loss from
customs revenues, not to make extra," says Abdel Rahman Al Saleh, the
executive director of Dubai Customs.
"Concerns over any inflation due to the
introduction of VAT are unwarranted," Saleh told the press here,
reiterating that the "government was aware of the effect of any new tax,
and has it as a top priority that prices in the UAE should stay in check".
Dubai Customs was
authorized by the GCC secretariat-general to conduct the study on VAT and
come up with detailed suggestions on its implementation in Gulf countries.
It is part of the taskforce that also includes IMF experts.
After the study
is completed, it will be passed on to the GCC annual summit for
ratification.
Once the study is ratified, observers say, it
is imperative that governments publicize the exact goods that will be
taxed, what the exemptions are and where the money is to be spent. They
add that basic foodstuffs must be excluded to protect low-income
residents.
While
analysts maintain that the argument for the VAT is valid and seems to be
an economically sound step to counter dependence on the volatile oil and
service industries, it is sure to cause further inflation in Dubai,
leaving the emirate stuck between a rock and a hard place.