Dubai Customs: VAT is "inevitable" boost to UAE's economy

Mr. Abdulrahman Al Saleh, Executive Director of Corporate Support Sector in Dubai Customs said that the statements of the International Monetary Fund about inflation increase by 2% after implementation of VAT in the UAE and GCC were based on personal speculation, and does not reflect the report's advice of the IMF on VAT implementation in the UAE.

Al Saleh's comments came after Mohsen Khan, IMF Regional Director in the Middle East, recently informed the media that VAT would result in an increase in the inflation rate by 1 - 2% if it was implemented in the UAE and the GCC countries, to his belief "implementing VAT now is overwhelmed by many problems, as the service-based economy needs some kinds of multi-sources income".

The IMF report talked about the inflation as result of implementing VAT; however, they have presented it in a positive manner: "In all countries adopting the VAT, its impact on retail prices is a source of concern for the politicians and the public. The evidence, however, suggests that there is no reason to expect that VAT would be inflationary, although the VAT may have a one-time effect on the general price level and may lead to a change in relative prices".

Consequently, Al Saleh deemed Mr. Khan's statements being incompatible with the IMF report which praised VAT and stressed on the necessity of an immediate implementation to strengthen the UAE economy.

"It is well known globally that implementing VAT in many countries has significantly contributed in boosting economy's sustainability, as VAT is considered the ideal tax for already strong economies. While UAE seeks to strengthen and diversify its economy, the country will not be an exceptional case in this regard", Al Saleh added.

It is noteworthy to mention that studies conducted by Dubai Customs indicated that the rise of inflation rate in the Emirates would not exceed a one-year-diminishable half (0.5)% when VAT is introduced, mainly because VAT will be a blanket between 3 and 5%.

Apart from that, VAT is going to replace the current customs duties amounting to 5%, thereby it is expected to support the price levels and mitigate the rise of inflation rate.

These positive consequences are well evident in the majority of 141 world economies that have implemented the VAT system.

IMF has recently reported that "The evidence from countries that have introduced the VAT suggests that in the majority of cases there was no or only minor increase and in some cases even reduction (e.g. Turkey and others) in the general price level associated with the introduction of the VAT, reflecting the fact that in most cases, the VAT was intended to replace other taxes. In most of the cases where there was an immediate increase in prices, VAT contributed less than 1% point and only in a few cases was the contribution to price increases greater than this".