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VAT could hike inflation, cost of doing business in GCC

The introduction of value-added tax could push the cost of living and doing business higher in the Gulf Cooperation Council (GCC) region, according to investment professionals and finance experts.

Katia Badr, a member of CFA Society Emirates, said that once VAT is implemented, operational costs could rise and businesses are likely to pass on the extra costs to the consumers.

“VAT does affect inflation in an economy,” Badr told Gulf News. “On one hand, the introduction of VAT will increase business cost and the burden will be passed on to the consumer which will lead to a rise in prices and hence lead to inflation,” she added.

Concerns about VAT's impact on inflation have also been raised by some finance professionals in the region. In a new survey by CFA Institute, 33 per cent of the organisation’s members expressed concern that VAT will increase inflation rates across the GCC. More than a quarter (28 per cent) also noted that VAT will increase the cost of doing business.

It was recently announced that the UAE will start collecting a five per cent VAT on certain goods and services in 2018. A VAT rate of five per cent could help generate additional revenue equivalent to about 1.5 per cent of the country’s gross domestic product, according to International Monetary Fund (IMF) estimates.

The country’s average inflation rate was 4 per cent in 2015. With the increase in US dollar and decline in imported items, coupled with the slowdown in transportation and housing rents, inflation rate is expected to be around 2.5 per cent this year.

CFA members aren’t the only ones who have cautioned against the impact of VAT on businesses. Finbarr Sexton, indirect tax leader for Mena at Ernst & Young (EY), had earlier said that VAT can affect “virtually all functions” within a business.

“VAT is applied on goods and services at each stage of the supply chain with the ultimate burden, in theory, being borne by the consumer,” Sexton explained. “If VAT is not applied correctly, it may become an additional cost to the business.”

Alp Eke, senior economist at the National Bank of Abu Dhabi (NBAD), said that based on “research empirical evidence collected in advanced nations with high VAT rate,” there is indeed a positive correlation between VAT and inflation, and the cost of doing business.

As a whole, however, there shouldn’t be a significant effect on consumers in the low to middle-income bracket, as well as on companies engaged in providing basic services and products, in the GCC given that essential items will be exempted from taxation and the VAT amount is only considered “mild”.

“Essential food items and daily necessities will  most probably be VAT-exempt, while luxury items and professional services will be VAT applicable. In the UAE, nearly 60 per cent of the household budget is spent on food, rents, utilities, health and education. These essential items will be most probably VAT exempt.”

However, the impact would be more recognizable among big spenders and visitors in the UAE. The cost of doing business for companies providing professionals services will also “slightly increase.”

“For high-income group and tourists, UAE will be a bit more expensive,” Eke told Gulf News.

He cautioned, though that applying 5 per cent VAT to all consumer goods will impact the low-income residents “severely”, so it would be a good idea to implement a tax system “that is the fairest.

”The other impact of VAT could also be anti-inflationary, according to Badr. “On the other hand, [VAT] will decrease the consumer purchasing power and hence suppress demand, and thus be anti-inflationary. Whether the introduction of VAT will increase inflation or not [however] depends on other factors such as economic growth and interest rates.”

Source: Gulf News

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