The Big Debate: Will VAT stoke inflation?

VAT a dilemma.  Should the UAE introduce value added tax, or not? 

It is a question that divides commentators.  On the one hand, some say that the tax will increase inflation, which is already estimated to hit 12.1 per cent this year, up one percentage point on 2007. The rising cost of living – with rent and food costs spiraling – is becoming an acute problem in the Gulf. A three or four per cent tax on goods can't help.

Others say that – because VAT will replace the existing customs duty of five per cent – there will be no impact on the cost of living.  The tax could even lower inflation as it will coincide with a cut in fees on imported labour.

Abdul Rahman Saleh of Dubai Customs recently told Emirates Business that a "Dubai Customs study revealed that 140 countries have enforced VAT and some have not used it to replace customs tax – instead it is enforced along with customs tax. This was the case in New Zealand where there were negative effects on inflation during the early period of enforcement."

However, the International Monetary Fund – which knows a fair bit about such things – believes that VAT would push up inflation by two per cent.

Other issues include the clash between the UAE Ministry of Economy and the Finance Ministry about bilateral agreements.

Sultan bin Saeed Al Mansouri, Minister of Economy, has protested against the VAT scheme, saying the UAE was party to several economic and free-trade agreements with GCC members and other Arab and Western countries. He said the tax would hinder UAE trade with those countries and add inflationary burdens.

So, should the introduction of the new tax be abandoned?  Or will its impact on the cost of living be minimal, and fairer to consumers because people who spend more will pay more?

Have your say by submitting a comment below, or emailing us at online@business24-7.ae.  The best comments will be published in Emirates Business on Sunday, July 20.

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