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The impacts of the introduction of Value-Added Tax in the UAE

Research · July 2020

DOI: 10.13140/RG.2.2.19441.71522

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 Research Project

The impacts of the introduction of Value-Added Tax in the UAE

By Ahmed Mohamad Youssef Al-Hamadi

Student ID: 1061952

Abu Dhabi University – Abu Dhabi

Course: Project in Accounting

Supervisor: Dr. MD Abubakar Siddique

Date: July 19th, 2020

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Abstract

The introduction of VAT in the UAE led to major changes in the country. This research is
conducted to understand and identify the impacts of introducing Value-added Tax in the UAE
and to highlight the advantages and disadvantages, impacts on the economy, impacts on
businesses, and impacts on consumers due to the implementation of VAT in the country. The
findings were presented by analyzing the primary and secondary data that provided qualitative
and quantitative information, which contributed to reaching the findings of this study. The
implementation of VAT contributed to enhancing the economy of the UAE by providing a new
source of income. Also, businesses in the UAE are impacted indirectly by the introduction of
VAT, as the new tax implemented led to several compliance costs and major changes to
businesses active in the country. The consumers are impacted directly by the introduction of
VAT as the inflation and CPI rates increased, which lead to increased consumer spending. The
implementation of VAT in the UAE is a step in the right direction, which will set the path for a
new efficient taxation system.

Keywords: VAT, UAE, TAX, Income, GCC, Businesses, Consumers, Economy, FTA

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Contents

Abstract ………………………………………………………………………………………...…2

1. Introduction …………………………………………………………………………………...04

2. Purpose of the study ……………………………………………………………….………….05

3. Literature review ……………………………………………………………………………...06

4. Reasons for implementing VAT in the UAE………………………………………………….08

5. Overview of Value-added Tax …………………………………….………………………….10

6. Research methodology ………………………………………………………………………..14

6.1Research questions …………………………………………………………………...14

7. The impacts of VAT on the economy of the UAE …………………………………………...15

8. The impacts of VAT on businesses in the UAE………………………………………………22

9. The impacts of VAT on consumers in the UAE ……………………………………………...27

9.1 Survey Analysis ……………………………………………………………………..28

10. The advantages and disadvantages of the introduction of VAT …………………………….34

10.1 The advantages of implementing VAT in the UAE………………………………..34

10.1 The Disadvantages of implementing VAT in the UAE ……………………………35

11. Research Findings …………………………………………………………………………...37

12. Limitation of the study ………………………………………………………………………39

13. Conclusion and Recommendation …………………………………………………………..40

References ……………………………………………………………………………………….41

Appendix ………………………………………………………………………………………...44

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1. Introduction
The United Arab Emirates is an Arabian country located in the middle east. The country was
founded in 1971 as a federation of six emirates, but currently, there are seven unified emirates.
The country is extremely rich in oil, which helped the rapid development of the country, and
made it one of the leading economies around the world. The country is very attractive to foreign
investors and expatriates, due to the availability of several business opportunities and jobs.
Currently, expats make up to more than 80% of the population, which reflects the number of
opportunities available for foreigners in the country. With the passage of time, the government
realized that to be a leading economy the government should not depend heavily on the
extraction of oil and gas to lead the economy. Therefore, plans were set to use the income
generated from the extraction of oil and finance several projects that will help the country
develop and be less dependent on oil. As a result, the revenue generated from non-oil sectors
make up to nearly 70% of the GDP, and the oil revenue contribution is decreasing over time.
Although the UAE already started the plans to diversify the sources on income, many GCC
countries did not, and the reliance on the extraction of oil measure between 20% and 70%. The
heavy reliance on oil raised the concern of the IMF, which as a result communicated its concerns
to the GCC countries that plans should be set to cut the government spending and work on
projects and strategies to diversify the sources on income. Therefore, the GCC countries signed
the common VAT treaty to implement VAT in the region. The region was attractive to foreign
investors and expats due to the free of tax environment, and people living in the region did not
pay taxes until the introduction of VAT.

Value-added tax is a type of consumption tax imposed on all parts of the supply chain and is
currently applied to more than 160 countries around the world. The first country to apply VAT
was France in 1954 and was followed by many countries over the years such as Brazil, Germany,
Sweden, Turkey, Canada, India, and the United Arab Emirates in 2018 (Bannaga, 2017). The
implementation of VAT is going to set a new culture for the people living in the country, as the
topic of taxation was not important in the region until VAT was introduced. Therefore, the
introduction of VAT could be a new path for future tax applications or VAT rate increase,
depending on the government's needs as the world change. Before the application of VAT,
different scholars and researchers predicted the outcome of the VAT application in the country,

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which was based on the impacts VAT had on other countries that implemented it. VAT was
applied in the country in January 2018, affecting all individuals and businesses in the country.

The introduction of VAT in the country had several impacts on people, businesses, and the
government. This paper focuses on identifying the impacts of VAT in the UAE after more than 2
years of the application. Although the period is considered short, and several outcomes of VAT
did not appear, several impacts can be identified currently. The paper consists of several major
topics about VAT in the country. These topics have been chosen depending on the available
literature and data published by other scholars, professionals, and governmental websites
regarding the impacts of VAT in the country. The main impacts of VAT in the paper highlight
the impacts of VAT on the economy of the UAE, the impacts of VAT on businesses active in the
country, and the impacts of VAT on consumers living in the UAE.

2. Purpose of the study

With the introduction of Value Added Tax in the country starting in January 2018, several things
have changed as a result of VAT implementation. The purpose of this study is to describe and
understand the different impacts of VAT in the country and contribute to the current knowledge
available about the topic. The current literature regarding the impacts of VAT in the UAE is very
scarce, which creates difficulties for researchers trying to explore the topic. This research will
add to the existing knowledge about the VAT in the UAE and will help future researchers by
providing additional data and facts regarding the matter. The purpose of this study is also
educational. The topic of tax in the country is very recent, and the public is not well educated
about the different aspects of tax and how does it work. This research will provide the reader
with solid knowledge about VAT and its different aspects, which will be covered in a specified
section in the paper. However, the primary purpose is to identify the impacts of VAT in the
country by analyzing different available resources to conclude the impacts of VAT on the
country`s economy, consumers, and business environment.

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3. Literature review
In the past, the value-added tax was hardly known in the world as it was only adopted in France
and the United Kingdom, and there was not much data available about it. In 2007, 4 billion
people were dealing with VAT, and it made around 20% of the total tax revenue collected
throughout the world. With the passage of time, more countries are starting to adopt VAT and
develop their tax policies around it, especially in developing countries. The rise of the adoption
of VAT raised the question about what makes VAT special, and what outcomes and
consequences does VAT promise (Keen & Lockwood, 2007).

The United Arab Emirates is one of the best countries in the world when it comes to the quality
of public services. The country has the lowest inflation rates globally, first in the world in the
road quality and public services, second globally regarding the impact of tax on investments and
businesses, and second in the world when it comes to the quality of infrastructure and aviation
sector. VAT was introduced in Western Europe to take place an already existing different tax
type lowering them, but when VAT was introduced in the UAE there was no existing tax system
to replace or lower. Therefore, it is obvious that the reason to apply VAT in the UAE is to fulfill
the fiscal gap and provide a new source of income that will help to diversify the country`s
sources of income, as the country was heavily relying on the oil revenue. Currently, over 150
different countries are adopting VAT around the world, making the concept of VAT known
everywhere in the world, like value-added tax impacts 90% of commerce patterns of
international trade. (Bannaga, 2017)

Before the application of VAT in the UAE, people were concerned that an application of a
consumption VAT in the country would harm the poorer group of people living in the UAE,
making the distribution of income worse as VAT will increase the prices of household needs and
expenses. When a country introduces a VAT, it is obvious that this introduction will lead to
increased prices of products and services. However, this change in prices might lead to demand
reduction, which can be an opportunity for the country to implement tools and policies that help
to control inflation and aggregate demand reduction. In 2008, Ehtisham Ahmad and Giorgio
Brosio conducted a simulation to predict the distributional impact in case a value-added tax was
introduced in the UAE. The findings of the study showed that the introduction of VAT in the
UAE will not affect households, and it will not create inequality due to the introduction of VAT.

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The results of the simulation suggested that introducing full VAT with no exemption will place
the burden more on the poor rather than the richer groups, therefore, some VAT exemption
policies must be introduced in order to lower the burden on the poorer group. Also, the
simulation showed that an exemption on healthcare and education will not impact equity,
because in the UAE the poorer groups have low consumption on these services, therefore, their
impact is not noticeable. The simulation concluded that an introduction of VAT will lead to a
positive impact on the distributional equality, and it will provide an efficient tax system without
affecting the poor noticeably. (Ahmad & Broslo, 2008)

In 2015, the International Monetary Fund advised the GCC member to not solely rely on the oil
income heavily and making it their main source of income, alternatively GCC members should
lower down government spending and find different sources of income like income tax,
consumption tax, and corporate tax. Nowadays, VAT is considered a very common tool in many
countries around the world as VAT provides a relatively stable source of income compared to the
other types of taxes. Value Added Tax is a consumption tax that can be very effective and
efficient in raising more income to the country that applies it, and when compared to the other
tax types that provide income to the governments, it was obvious that VAT was more efficient as
it provides broad coverage of the economy. However, VAT is a regressive tax that places a
higher burden on the poor, making them pay a higher percentage of their income as VAT when
compared to people with higher income. Therefore, governments must be considerate to this
point when applying VAT to lower the burden on the poor. This challenge can be overcome by
applying tax exemptions to the various products that the lower-income people consume day
today, and that will make VAT more efficient and practical by lowering the burden on poor
people. (Sajeewani & Meng, 2017) The introduction of VAT in the UAE pushed the need for
various tools and procedures to ensure compliance and understanding of the new tax system.
Firstly, with the application of VAT in the UAE, there is a need for updated software to cope
with the new tax systems, as businesses did not have such software and technology due to the
country not imposing taxes on businesses. Secondly, ongoing compliance and review checks
should be conducted on a daily basis to ensure that the company is complying with the
requirement of VAT continuously. Lastly, the use of external advisors should be utilized,
because the concept of taxes is recent in the UAE, and current businesses do not have much
experience regarding the matter. (Zafarullah, 2018)

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4. Reasons for implementing VAT in the UAE
Since the country was formed, the UAE has been heavily reliant on the sale of oil and gas to
develop the country and cover the governmental spending. Which led to the country growing and
develop rapidly over the years. However, a question was raised by the government and people
started wondering about a future where oil is not very valuable and cheap. Therefore, a vision
was established by the rulers to set up plans and projects that will build a future where the
country is no longer relying on the extraction of oil and gas to lead its economy. One of the core
components of the vision is to develop a world-leading economy, which is why the country can
no longer rely on the prices of oil to lead the economy. As a result of the mentioned facts, the
UAE started looking for alternative sources of income that will lower the burden of the reliance
on oil, and that is one the main reasons why VAT was introduced.

Figure 1 Sectoral distribution of GDP at constant prices for 2018 (MOE)

As the Ministry of Economy annual report shows, the extraction of oil and gas contributes to
about 30% of the country`s GDP, which shows that the country is still relying on the industry the
most when it comes to the GDP. However, the reliance on oil and gas is decreasing as time
passes, as the contribution of the oil sector to the GDP in 2015 accounted for 34.4% (MOE),
which shows that the government is making efforts to diversify its sources of income.

The reasons of the introduction of VAT in the country are many, however, one of the main
reasons that VAT was introduced is to diversify the country`s sources of income. The GCC
countries have been relying massively on oil income to finance their governmental spending and

8
expenditures, as oil income accounted from 50% to 90% across the GCC countries during the
period of 2012-2015. Recently, oil prices are fluctuating and decreasing over the years, and this
shows a major risk for the GCC countries as they are intensively relying on the oil sector. The
drop in oil prices created fiscal deficits in the GCC countries, and efforts to diversify their
income was made. These efforts led to a common VAT agreement between the GCC countries to
implement value added tax within a timeline. Therefore, VAT was introduced in the UAE in
2018. (International Monetary Fund, 2016)

Another reason why the country adopted VAT, is that VAT will bring with it a modern system of
tax to the country. This aim was highlighted in the GCC`s 2015 annual meeting in Doha, as it
was concluded during this meeting that the current tax systems in the GCC are not efficient
enough to meet the financial needs when a period of low oil prices is approaching. Before the
implementation of VAT, the tax system in the country was poor and inefficient (Bannaga, 2017).
Therefore, applying VAT in the UAE will bring with it a modern and capable tax system that
will be able to respond to financial needs. For example, in Saudi Arabia the VAT rate was 5%
since the implementation of VAT, and when the corona virus created major financial issues and
drop in oil prices, the country was able to quickly respond by increasing the VAT rate to 15%
that will help to cover the financial deficits. The country would not be able to do so if VAT were
not implemented, and this shows how VAT will bring with its application a modern and efficient
tax system.

The introduction of VAT in the country will create a new source of income that will help to
diversify the sources of income, and will help to reduce the reliance on the oil sector. Also, this
step will bring with it a new reliable taxation system that will be able to respond to financial
difficulties and fiscal deficits. In 2018, the value added tax contributed for 5.5% of UAE`s public
revenues, as the country made more than 25bn dirhams of tax revenue (Mansoor, 2019). VAT
will help the country to strengthen their financial tools and options, and will contribute to the
country`s vision and plans to the future.

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5. Overview of Value-added Tax
Value-added tax is a type of consumption tax that is applied to all parts of the supply chain.
Consumption taxes are a special type of taxes that are collected by the retailers and businesses
from the customers and given to the government afterward. Consumption taxes are imposed on
the purchase of goods and services, making them an indirect type of tax that is collected by the
seller, which lowers the burden of the government to collect the taxes themselves. Sales taxes
and value-added tax are the most common types of consumption taxes, however, unlike value-
added tax sales tax is paid only when purchasing a final good. Currently, VAT is being applied
in more than 150 countries around the world and has become a crucial part of any country`s
taxation system (Beyond Numbers, 2019). As a part of the GCC common VAT agreement, VAT
became effective in the UAE since the start of 2018. A percentage of 5 is applied to the purchase
of goods and services as a VAT, along with some zero-rated and exempted supplies.

How does VAT work?

Figure 2 VAT (u.ae)

With the introduction of VAT in the country, questions about the VAT systems were raised, and
efforts were made to inform the public. Figure 2 shows how value-added tax works in the case of
a date syrup factory. The first step is when the farmer grows the dates on his farm, and when
they are ready to be picked and sold the farmer does so. After the collection of dates, the farmer
sells the dates to the factory with a specific price, and an amount of 5% will be added to the
transaction as VAT which will be paid by the factory. In this scenario, the farmer is collecting
the VAT amount from the factory on behalf of the government, which later will be paid to the
government. In the second step, the factory processes the dates into a date syrup after purchasing
them from the farmer. After the procession is done, the date syrup is sold to a retailer for a given

10
price, and VAT of 5% of the transaction will be added to the price and paid by the retailer. In this
scenario, the factory is receiving VAT payment from the retailer that will be some kind of a
refund to the factory that paid VAT to the farmer. If the VAT received by the factory is more
than the VAT paid, in this case, the factory must pay the government the amount of VAT
collected. In another scenario, if the factory collected VAT less than the amount paid, in this
case, the factory must file to the federal tax authority a tax refund request.in the third step, the
retailer sells the date syrup to the end customer who pays the price of the syrup with the amount
of VAT added to the price, and this is how the retailer will collect VAT from the end customer.
With the end of the last step, this ends the VAT cycle by reaching the final purchaser. In other
words, the final purchaser is the one who will have the burden to pay the VAT to the
government, as all the production steps are refunded of the tax paid. Figure 2 also illustrates how
VAT is applied to all parts of the supply chain and shows the difference between VAT and sales
tax.

Types of VAT rates in the UAE

Figure 3 (NVENTEQ.COM)

Generally, VAT is a regressive type of tax in nature, which means that people with lower income
will be paying a higher percentage of their income as VAT compared with people with higher
income. To illustrate, imagine if person X has an annual income of $2,000, while person Y has
an annual income of $20,000. Both of them purchased an item that costs $1,050 with a VAT of

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$50 included. In X person`s case, $50 of VAT means that X person will be paying 2.5% of his
income as VAT. On the other hand, $50 of VAT to Y person means that he will be paying 0.25%
of his income VAT. The example shows how VAT can be regressive and places a higher burden
on the poor in that contest. However, this is not always the case as people with higher incomes
mostly consume products and services that are more expensive, therefore, making them more
subject to value-added tax. Nevertheless, this does not stop the government`s effort to support
the poor and lower their tax burden by offering different rates of VAT for a different supplier. In
the UAE, there are 3 types of VAT rates applied to goods and services. These are as follows:

o Normal tax rate: a normal tax rate of 5 % is applied to most goods and services as VAT.
Businesses who have an annual income above 375,000 DHS from the taxable supplies
and imports are required to register with the federal tax authority. For example, if the
business owner who deals with this type of VAT has a good that is priced at 1,000
dirhams, he must charge the customer with an amount of 50 dirhams as value-added tax,
which will be sent to the government. An example of good and services of this type are
very wide such as clothes, hotels, retail supplies, commercial property, stationary, and oil
and gas products.
o Zero rated VAT: this type of VAT is mistaken very often to be tax-exempt; however, this
type of VAT is different. VAT is not charged on the products that fall under the zero-
rated category according to the governmental policies. Some might wonder why it is
zero-rated rather than being exempted, the answer is that zero-rated supplies are
considered taxable, but the rate is zero, which could be changed any time if the
government chose to do so. Businesses who sell and deal with zero-rated supplies are
usually paying VAT when purchasing their raw material, therefore, these businesses are
paid a tax refund by the government. Most zero-rated supplies fall under the needs of
education and medication, which shows that the government is taking care of its citizens
by lowering the impact of VAT on the most important needs of its people. Examples of
zero-rated supplies that fall under education are private and public school fees, higher
education, educational school trips, nursery and preschool education. (Federal Tax
Authority)
o VAT exempt supplies: exempted supplies refer to products and services that do not
include VAT payments, and it could show that there are no plans and intentions to charge

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 VAT at this kind of service in the future. Businesses who sell exempted supplies have no
right to claim a tax refund from the government. For example, a local transportation
company that purchases oil and gas products pays VAT when purchasing these needs.
However, this company cannot file a VAT refund from the government and should treat
the VAT paid as a business expense. This shows a difference between zero-rated and
exempted supplies, where businesses that deal with zero-rated supplies are allowed a tax
refund, while the other businesses that deal with tax-exempt supplies cannot. An example
of VAT exempted supplies in the UAE are domestic passenger transportation, bare land,
life insurance, and sale or rent of residential buildings after the first supply (Federal Tax
Authority).

Accounting treatment

The impact on value-added tax introduction on accounting does not fall purely under the way of
how to keep the books and make the transactions, as the introduction of VAT brings liability to
businesses to maintain their books. Businesses now must keep their accounting books and
records for a minimum of 5 financial years, examples of the records that must be kept by
businesses in the UAE are as follows (NVENTEQ SOLUTIONS FZC):

o Sales invoices
o Purchase invoices
o Debit and credit notes, and Import and export records
o Accounting books
o Exempt and zero-rated supplies and purchases
o The records of products and goods issued for free or use of the business

Accounting entries of value-added tax are different between the purchase and sale transactions.
For example, X company purchased an item from a supplier that costs 40,000 dirhams without
VAT, the accounting entry will record a debit of 40,000 as purchases, a debit of 2,000 as VAT
input, and credit of 42,000 payment to the supplier. After the purchase of this item X company
sold it to a customer for 60,000, the accounting entry will record a debit of 63,000 cash, a credit
of 3,000 as VAT output, and a sales revenue of 60,000. All the record of VAT collected and paid

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is kept in special accounts, and compared at the end of the year to determine whether there is a
VAT payment that must be delivered to the government or refunded to the business.

6. Research methodology
To understand and describe the impacts of value-added tax in the UAE, primary and secondary
data was collected. The primary data was collected by conducting a survey that consisted of 6
multiple-choice questions. The aim was to collect data from more than 50 consumers around the
UAE. A consumer was identified as an adult person living in the country who can make his own
dependent purchase decision, which will help understand the impacts of VAT on regular
consumers living in the UAE. The time it took to fill the survey averaged 1 minute to fill the
survey anonymously. However, due to the Covid-19 situation, physical questionnaires were not
an option, and an online tool was developed to conduct the survey. The online tool limited the
number of participants to a number of 40 participants, which is why the survey analysis included
the response of 40 participants. The secondary data was analyzed by collecting data from other
researchers and published reports about the matter, which will be disclosed in the references
section. Also, qualitative, and quantitative data were collected to describe the impacts of VAT in
the country. The qualitative data falls primarily on the conclusions and descriptions published
about the topic, while the quantitative data falls primarily on factual figures and numbers that
will help understand and explore the topic. The collection of the primary, secondary, qualitative,
and quantitative will be analyzed and explored in order to reach certain conclusions regarding the
topic, which will be highlighted in the finding section of the paper.

6.1 Research questions

The value-added tax was introduced on the first of January 2018. Since then, a lot has changed in
the country, which pushed the need for studies to be conducted to understand and explore the
impacts of VAT since the application. The questions this research paper aims to answer is
highlighted in the following:

o What is the impact of the introduction of VAT on the economy of the UAE?
o Are the businesses in the UAE affected by the introduction of VAT?

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 o Does the introduction of VAT have an impact on regular consumers in the UAE?
o What are the advantages and disadvantages of introducing VAT in the country?

7. The impacts of VAT on the economy of the UAE

As noted, the main reason for introducing VAT in the country is to boost the tax revenues and
cover the fiscal deficits, which was created due to the reduction in oil prices. Although a period
of 2 years is not enough to judge the impacts of VAT on the economy, however, some insights
can be noted when reflecting on the conditions before and after VAT.

Generally, VAT can produce many impacts on the country that adopts it, which should be
studied and forecasted in order to set up plans to control the effects. The idea behind the value-
added tax is that this type of tax is efficient, and leaves the consumer with no choice. When
applying a general VAT, the consumer does not have many ways to escape paying, therefore, the
consumer is only left with a choice to purchase the taxed products, or do the services by himself.
Many believe that VAT leads to increased inflation, but VAT also leads to a degree of deflation.
If a country introduces VAT to increase the revenue, it will lead to a decrease in consumption. In
addition, the revenue generated could be used to cover fiscal shortages and reduce the
borrowings of the public sector, which leads to a fall in the interest rates in the cost of capital. In
addition, VAT impacts foreign trade positively, as it allows foreign trade to be conducted on a
transparent basis. One of the impacts of VAT on the economy is that it allows the growth of the
governmental sectors, as it allows the government to gather more resources and fund. (Tait,
1988)

According to the global experience, a rate of VAT of 5% will lead to increased inflation in the
country, which was forecasted to be an increase of 1% in inflation. Several assumptions also
suggested that the introduction of VAT will lead to a rise in the GDP by 0.2 to 0.4%, but the
increase will depend on the way of the application of VAT and which goods and services will be
exempted. However, people feared that the efficiency of the VAT will be affected by the
collection and filing procedures adopted (Zafarullah, 5). The impacts of VAT have been evident
globally. The developing countries seem to benefit more from value-added tax when compared
to the developed country, which was evident in China`s case. A study showed that countries who

15
adopt VAT are linked with experiencing a long term growth of 4.5% when it comes to the
revenue to GDP ratio (Barghathi & Saderuddin, 2018).

A study was conducted by one of the big four accounting companies PWC to examine the
impacts of VAT after one year of the introduction. The study concluded that the VAT
introduction led to a price rise in January 2018. The consumer price index increased by 2.7%
during the period as a result of introducing VAT in the country, which can be explained by the
price rise during the year in several components (PwC, n.d.). The figure shows how different
public needs rose in value with the introduction of VAT, which was an expected result. The
health and education sectors seem to be less affected than the others, and this is because of the
different zero-rated and tax exemptions policies that were set by the government. The
transportation prices rose due to an additional reason, which is when the government stopped
subsidizing the fuel. However, the price change in the transportation in the UAE is less than the
change in Saudi Arabia, because in the UAE the cut in fuel support was before the introduction

16
of VAT, whereas in the KSA the introduction of VAT and the subsidizing cut were introduced
together.

There has been a lot of changes in the economy of the UAE recently, and this was due to the oil
prices reducing massively during the years. In 2020, the oil prices reached a very low point,
which made the public understand why the country is taking various steps to diversify the
income sources. It has been 2 years since the introduction of VAT in the country, and to
understand the changes in UAE`s economy different indicators will be examined in this paper,
these are as follows:

o Gross Domestic Product Growth rate

Figure4: GDP growth rates at constant prices, (%) source: Annual Economic report (UAE Ministry of Economy, 2019)

17
The GDP growth rate gives an idea of how quickly the economy of the government is growing.
If the GDP growth rate is positive, it shows that the country is expanding and there are a lot of
opportunities for investment and job creation. On the other hand, if the growth rate is negative, it
might indicate a possible recession (AMADEO, 2020). As shown in the figure, the GDP growth
rate peaked in 2011 reaching a point of 6.9%. It is noticeable that the GDP growth rate peaked in
the same year as the peak in oil production growth reaching more than 11%. The crude oil prices
were skyrocketing during 2011, and the price of a barrel was more than 110$ dollars during this
time, which led to more oil production growth and GDP growth rate. The lowest point of GDP
growth rate was during 2017, which was also the lowest point of oil production growth. During
2017 the GDP growth rate measured for 0.5%, whereas the oil production growth measured for
–3%. From the stated facts, it is noticeable how the GDP growth is depending on oil production
as they peaked and reached the lowest point in the same periods. Another finding could be how
important the non-oil production is to the country currently, as the oil production reached an all-
time low, and the country was still able to grow positively despite the fact that the price of oil
barrels reached nearly 40$. During 2018, the GDP growth rate improved from 2017`s rate of
0.5% reaching 1.7%, this was due to a recovery in the oil production growth that reached 2.8%,
and the non-oil production growth that accounted for 1.3%. The tax revenue during 2018
accounted for more than 20bn dirhams, which could be one of the reasons for the growth
improvement.

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 o Inflation

Figure 5 Inflation rates in the UAE. (UAE Ministry of Economy, 2019)

Price inflation is an economic indicator that represents the increase in prices of common goods
and services consumed by people living in the country. During 2015, the rate peaked to more
than 4%, which was due to the increased cost of living in the year reflected by the increase in
housing utility costs, and transportation (Maceda, 2015). The rate decreased massively the
following year, reaching a point of 1.6% that shows a decrease in the prices in the country.
During 2018, the inflation rate reached 3.1%, showing an increase of 1.1% in comparison to the
previous period. The reason for the increase in inflation was due to the implementation of VAT
in the country, along with an increase in the price of oil during 2018. As was expected by the
scholars, the introduction of VAT impacted the economy by increasing the inflation rate.

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 o Final Consumer Expenditure

Figure 6 The Final Consumer Expenditure of 2017 and 2018 (in AED million) (UAE Ministry of Economy, 2019)

The final consumer expenditure indicates how much the government is spending in order to
satisfy the needs of its people. As oil prices increased by 33% during 2018 compared to the year
before, the country was able to collect more resources that can be spent to satisfy the public and
finance strategic projects. Part of this spending was used to finance projects that allow the
activation of plans that aims to diversify the sources of income, and during this period, the value-
added tax was implemented in the country. The implementation of VAT helped the country to
collect more sources that can be spent to provide high-quality public services, which can be
reflected in the increased Final Consumer Expenditure in comparison with 2017. In 2018,
government consumer expenditure increased by 3.5%, which shows that the government
currently has more resources to spend to satisfy the public. Also, private consumption has
increased massively measuring for a growth of 11.2%, which shows increased consumption by
the individuals within the country. The introduction of VAT increased the CPI in the UAE,
which could be one of the reasons why consumers are spending more compared to the period
when no VAT was levied in the country.

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 o Other indicators
o Foreign Direct Investment

With the introduction of VAT in the country, there were fears that this move would lead to
demotivating potential future investors. Many argued that the implementation of VAT in the
country could mean that the government is intending to apply more taxes in the future,
therefore, people expected that foreign investment is going to decrease in the country. The
FDI currently is stable compared to prior periods, as the annual FDI inflow measured for
$10.385 bn in 2018 (UAE Ministry of Economy, 2019). The annual FDI inflow during 2017
accounted for $10.354 bn, which shows that the FDI inflow is not affected by the
implementation of VAT negatively.

o Public Revenues

During 2018, the public revenue grew massively due to various reasons. One of the reasons
is the increase in oil price by 33% in comparison to the prices in 2017. Also, the application
of VAT and other types of commodity taxes helped to increase the tax revenue from AED
22.1 bn during 2017 to AED 25.03 bn in 2018 (UAE Ministry of Economy, 2019). This
shows that the application of VAT helped the country generate more funds to finance its
public expenditures. In addition, corporate profits and general revenues increased noticeably
and were better than what they measured during 2017. At the end of 2018, the public
revenues accounted for AED 455.516 bn, whereas it accounted for AED 401.894 bn in 2017.

The introduction of VAT impacted the economy of the UAE positively, as the implementation
resulted in a growth in the GDP rate, an increase in government consumer expenditure, a stable
FDI inflow, and more public revenue. However, the implementation resulted in an increase in the
CPI, inflation rate, price changes, and private expenditure.

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8. The impacts of VAT on businesses in the UAE
With the introduction of VAT in the country during 2018, it was expected that the introduction
will lead to a big change to businesses in the UAE. The country did not impose any type of taxes
previously, except income taxes imposed on foreign banks and oil and gas companies.
Businesses in the UAE did not have an existing tax system and software, which is why the
introduction of VAT will require major changes in the registered companies. The introduction of
VAT in the UAE will force businesses to adapt to the new tax system imposed, as businesses
will have to comply with the new tax laws. VAT does not mean that companies in the UAE will
be paying an amount of tax for the government, as VAT is placing the burden on the final
consumer who will be paying the amount of tax, while businesses will be getting a tax refund for
the amount of VAT paid by them. However, the effects of VAT on businesses do not fall under
paying an amount of tax, but the effects truly lye within the system adjustment to comply with
the new rules needed to comply with the tax policies. This means that businesses will have to
adjust their existing management and accounting system to be able to collect VAT and file the
correct documents to the Federal Tax Authority.

As mentioned before, the introduction of VAT does not impact businesses with tax expenses, as
the VAT transfer the costs paid to the final user. Therefore, businesses will be acting as tax
collection agents on behalf of the government, which comes with more legal and financial
liabilities. The costs of VAT to businesses are generally indirect, and businesses should assess
the impacts of VAT on their business regularly. The major costs of VAT on businesses are the
costs of VAT compliance, which depend on the laws and regulations imposed by the Federal Tax
Authority. Businesses are now required to carefully plan and manage their cash flows in order to
track how much cash and revenue is related to the value-added tax, and should be paid to the
government. As disclosed by the Federal Tax authority, businesses are required to retain their
accounting books and record for 5 years, which leads to an increase in accounting efforts
performed. Currently, as VAT is introduced businesses are required to carefully document the
required details by the Federal Tax authority.

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The records to be retained fall under the following (Federal Tax Authority):

o Balance sheet
o Statement of profit and loss
o Record related to the Fixed Assets
o Payroll
o Inventory and stock levels
o Accounting records (revenues, expenses, purchases, receipts, and sales)

The Federal tax authority also suggests that businesses might have to change their core business
operations, procedures used to keep the accounting records, accounting technologies, human
resources, and the financial management.

Figure 7 compliance time needed when documentation is required with return submission (PwC)

A study was conducted by PricewaterhouseCoopers (PWC) to measure the time needed for VAT
compliance given various scenarios. This figure shows a scenario when businesses have to
submit different documentation with the tax return submission, which is one of the requirements
in the UAE. The Yes economies refer to economies where businesses are required to submit
documentation, while No economies refer to the economies that do not require it from
businesses. The figure shows that businesses need nearly double the time needed to comply
when asked to present documentation, which could lead to more compliance and accounting

23
costs. On the other hand, economies where businesses are not required to submit documentation
require nearly 76 hours for VAT compliance, which indicates that not requiring documentation
leads to a major relief when it comes to VAT compliance. However, this could lead to more tax
evasion and fraud acts, as when no proper documentation is provided there is nothing that proves
that the VAT return submitted is accurate. Also, not asking for presenting documentation could
lead to an increased audit efforts and costs.

One of the major impacts on businesses due to the introduction of VAT is compliance costs and
administrative costs. Various reports showed that the expenses related to administration
accounted for 0.7% in the United Kingdom, which shows that the application of VAT increased
the administrative costs. During the year 2015, a study conducted by KPMG concluded that VAT
compliance costs measured for £1 bn (0.08% of the GDP). The same study reflected the small
businesses are the most affected by the compliance costs, this reflection concludes that VAT
compliance costs are regressive because it affects smaller businesses more. (Barbone, Bird, &
Vazquez, 2012)

The topic of VAT in the country is very recent, and studies regarding the compliance costs are
not available currently. However, the impacts of VAT around the world give an idea of what
could possibly occur in the country. The regulation of VAT requires businesses to retain a huge
number of documents for 5 years, which is a huge amount of data. For businesses to comply with
these regulations a lot of efforts must be made, which leads to more expenses. Several studies
suggested that not only expenses will increase, but also the psychological costs. To comply with
the rules, accountants make a huge amount of effort and a simple mistake could lead to fines and
punishments by the Federal Tax Authority, which leads to increased psychological pressure
among employees responsible for the VAT compliance. Therefore, the increased amount of
documentation required will lead to more psychological effects on the people involved.

With the introduction of VAT in the country, major changes are required to comply with the new
tax system. The compliance with the laws of VAT requires businesses to prepare in terms of
logistics, administration, and legal aspects. The way businesses deal with their daily operations
and transactions must be developed and carefully reviewed to ensure compliance with VAT
requirements. These changes must include nearly all business operations, varying from the IT
department, cash collection, HR system, supplies, and finance system in the business. Therefore,

24
more opportunities will be available for advisory services and tax finance, which leads to
increased compliance costs by businesses who take this step. (Bannaga, 2017)

Moreover, an article wrote by John Hanafin (2018) suggests that the introduction of VAT in the
UAE will lead to an increased number of challenges and costs to businesses existing in the
country. Firstly, VAT will lead to increased costs falling under administration costs and costs of
implementation. To ensure VAT compliance, serious updates are required to the internal systems
and IT along with training sessions for existing workers. If there are no existing VAT experts,
companies will have to employ new accountants that have knowledge in handling VAT, and
increasing compliance costs. Secondly, to comply with the new rules of VAT businesses must
undertake changes to the existing business structure. Value-added tax is imposed on every
production stage, which makes businesses who have different entities in charge of the same
products face several issues by being taxed on intercompany transfers. Therefore, businesses
must consider restructuring their owned entities to avoid double taxation. Thirdly, businesses are
required to ensure proper documentation of their record for a 5 years period. This requirement
forces business to continuously check their record and keep them updated, which will help the
company be ready in case of an audit. Lastly, VAT creates uncertainty within the organization as
the rates could change in the future. The change in the rate and exemptions could create future
costs for the businesses, which increases the number of concerns about the future of VAT.

Businesses are concerned with the compliance and its costs due to the possible penalties and
fines that can be charged on them. With the introduction of VAT in the country, many federal
laws were issued to organize the implementation of VAT. These laws are as follows (Cabinet
Resolution No. 40):

o The failure to present prices with tax inclusion will lead to a fine of 15,000 DHS.
o Moving the good from the designated zone, or failing in keeping the goods in the
designated zone will result in a fine of the higher between 50,000 DHS or 50% of the tax
chargeable on goods.
o When making a supply, if the taxable person failed to make a tax invoice, or a document
with the same purpose, the taxable person will be charged 5,000 DHS for every document
or tax invoice not issued.
o 5,000 DHS for every tax credit note not issued by the taxable person will be charged.

25
 o If the taxable person failed to comply with the processes and procedures needed for
issuing electronic tax invoice and tax credit notes, he will be charged amount of 5,000
DHS for every incorrect document.

The impacts of VAT on businesses in the UAE are indirect, as businesses do not pay VAT
mostly, but act like tax collection agents. The main impact is the VAT compliance costs that lead
to businesses changing their structure and bookkeeping procedures because the FTA requires
proper documentation of the business transactions and VAT collected. Also, changes to the
business structure are required, as the introduction of VAT results in changing the way of
conducting and running a business in the country. Failure to comply with the rules and regulation
will lead to several fines and penalties, resulting in businesses keeping close attention to their
accounting procedures.

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9. The impacts of VAT on consumers in the UAE
Consumers are an integral part of any economy, as their spending behavior and purchasing
decisions determine the success of every business. The introduction of VAT in the UAE affected
all consumers throughout the country because VAT is a general tax that is levied on most goods
and services. However, the amount of impact is different from a consumer to another, because
not all consumers spend the same. For example, if person X only purchases necessity goods and
always look for cheaper alternatives, while person Y is a heavy consumer of luxurious goods and
services, person X will be least subject to VAT when compared to person Y who will be more
subject to VAT. The effects of VAT on consumers is determined by the buying behavior,
lifestyle, and habits, which is why different consumers will be experiencing different impacts
due to the application of VAT (Shahid). The first major impact of VAT on consumers in the
increase in prices. The implementation of a 5% VAT means that all products subject to VAT will
increase in price by an amount of 5%. The way VAT work lays the burden on consumers who
bear the burden of the tax. However, VAT was not the only reason for the increase in prices, but
other reasons such as the excise tax, and the cut in petrol subsidizing all led to increasing the
prices for regular consumers in the country.

Figure 8 CPI in the United Arab Emirates (TradingEconomics, n.d.)

The CPI measures the monthly change in a given basket for commonly consumed goods and
services such as transportation, clothes, food, and transportation. The figure reflects the
measurement of the CPI in the UAE from 2016 till the end of 2019. The graph shows a
significant change in the CPI when VAT was introduced in the country. During 2017, the CPI
averaged 107, and increased with the implementation of VAT by 5 during 2018, which
concludes that the implementation of VAT had an impact on consumers by increasing the prices.

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9.1 Survey analysis
The amount of literature regarding the impacts of VAT on consumers is pretty scarce. Therefore,
a survey was established in order to gain primary data that will help understand and analyze the
impacts of VAT on consumers in the country.

Question 1: AGE

The purpose of this question is to identify the demographic information of the participants. The
questionnaire was aimed mainly at adults, as they are mostly independent and make their own
choices. The responses show that the majority of the participants are between the age of 22 and
25, making up to 45% of the total participants. Also, it appears that people from the age between
18 and 21 are measuring for 40% of the participants. People aging 26 and above are measuring
for 10% of the participants, while people from the age group of under 18 are making up to 5% of
the number of the participants. As the questionnaire was aimed at adults, 95% of the participants
fall under the aimed for the category, which will lead to receiving the best possible outcomes.

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Question 2

How much do you spend on VAT taxable products and services in a month?

The purpose of this question is to get an idea of the amount of money the participants spend on
taxable products and services in a month, as the amount of consumption leads to being more
subject to VAT and its impacts. The survey shows that 37.5% of the participants are spending
between 200 DHS and 500 DHS monthly, which is the highest group of consumers among the
participants. Also, people who spend between 1,000 DHS and 1,500 DHS are measuring for
2.5%, while people who spend between 1,500 DHS and 2,000 DHS are measuring for 5% of the
participants. The number of participants that spend between 500 DHS and 1,000 DHS makes up
17.5% of the participants, which is the third-highest percentage among the participants. The
more people spend on taxable products and services, the impact of VAT increases on them.
therefore, the group of participants who spent more than 2,000 DHS is the most affected by the
introduction of VAT, while the people who spend under 200 DHS monthly are the least affected.
This question proves the point that different consumers are affected differently by VAT.

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Question 3

Is your purchasing decision impacted by VAT?

The purpose of this question is to understand whether the amount of VAT charged can impact
the consumer`s buying decision. The majority of the participants are admitting that the amount of
VAT charged is impacting their buying decision. Therefore, this could conclude that the demand
patterns of individuals are impacted by the introduction of VAT, which might lead to consumers
looking for cheaper alternatives, or cutting the number of their consumptions. Also, this
conclusion could lead to businesses adjusting their market positioning, as the consumer decision
making is changing after the introduction of VAT. Possible solutions could be enhancing the
quality of the product or service, or reducing the price before VAT if the amount of demand is
impacted negatively. On the other hand, 37.5% of the participants are concluding that the
introduction of VAT in the country did not impact their purchasing decision. Although VAT is
increasing the prices, however, the rate of 5% is considered low in comparing to the other
economies in the world, which could be a reason why consumers are not impacted by VAT.
Also, the type of products consumed could lead to the differences in answers.

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Question 4

Are you aware that there are zero-rated and VAT exempted products/services?

The purpose of this question is to get an idea of whether people living in the UAE are familiar
with the different aspects of VAT. The survey shows that only 55% of the participants are aware
of an existing zero-rated and VAT exempted supplies. This could lead to the public possibly
being tricked by the suppliers of such products, and pay an amount of VAT that should not be
paid, as 45% of the participants are not aware of such topics. Also, this could impact the
consumers` ability to look for exempted and zero-rated alternatives while making their purchase
decision. The VAT has been implemented for more than 2 years in the country and there are still
people who are not aware of such topics. Therefore, the government should continue making
their VAT awareness campaigns and make efforts to educate the public about the concept of
VAT.

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Question 5

How would you describe the 5% VAT rate?

The purpose of this question is to understand the perception of the consumers about the imposed
tax rate. The majority of the participants believe that the VAT rate of 5% is fair, as 65% of the
participants answered the question with fair. The majority believing that the rate is fair could
lead to more compliance with the VAT implementation, as several countries around the world
faced serious rejection from the public when implementing VAT. Also, this result could be due
to the fact that the VAT rate is considered low globally and the impact on prices is not that huge.
However, 35% of the participants believe that the 5% rate of VAT is not fair and should be
lowered. The difference in responses could be due to the difference in consumers. People
consuming luxurious and expensive products and services will be subject to more VAT
expenses, therefore, leading to the belief that the 5% of VAT is unfair and should be lowered. On
the other hand, people consuming cheaper products will be subject to less amount of VAT and
the impact of VAT will not be noticed. In the end, the majority of the participants believing that
the amount is fair will lead to reduced opposition to the VAT and will not impact their consumer
behavior massively.

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Question 6

Overall, are you with or against the introduction of VAT in the country?

The purpose of this question is to measure the acceptance of the VAT implementation if the
country. The majority of the participants support the introduction of VAT in the country, while
47.5% of the participants disagree. Although the majority support the introduction of VAT, the
results are close as 21 participants support the idea of VAT, while 19 participants are against.
47% of the participants would prefer to live in the country while VAT is not implemented. This
could be due to the type of consumption this group of people is consuming because being against
the implementation of VAT in the country means that this group of people is the most impacted
by the VAT expenses. The number of participants is considered very small in comparison with
the actual number of consumers in the country, however, the results show that there are people
who are against the implementation of VAT in the country. Also, this group could be unaware of
the reasons for implementing VAT in the country and only consider VAT as an increase in prices
without benefit. The government should continue its efforts to educate the public about the
positive impacts of VAT on the country to gain more support from the public. In the end, the
majority supporting the implementation regardless of the impacts of VAT on them means that
the public is very supportive and confident in the government.

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10. The advantages and disadvantages of the introduction of VAT

10.1 Advantages of implementing VAT In the UAE

The introduction of VAT in the UAE as a result of careful planning by the GCC countries over
the years. With a period of low oil prices approaching, the GCC countries started looking for
different sources of income that will help them cover the fiscal deficits. However, there are
several positive effects of implementing VAT to the country that adopts it, which can be noticed
by the continuous increase in the number of countries adopting VAT over the years. The merits
of value-added can be summarized in the following:

o New source of revenue: One of the main reasons for introducing VAT in the UAE was
to boost revenue. With the GCC countries being heavily reliant on the extraction of oil,
concerns were raised by the IMF to the GCC that plans to diversify the sources of income
should be set. As mentioned before, to be a leading economy the country cannot be
reliant on the extraction of oil and oil prices to determine its financial power, which can
be evident in the current Covid-19 situation. The introduction of VAT helped the UAE to
increase its tax revenue reaching more than 25 billion DHS, which provides actual
evidence of the amount of revenue that could be generated with implementing VAT.
o Efficient taxation system: Value-added tax is considered one of the most efficient
taxation systems and is now an integral part of every developed country's taxation
system. Before the introduction of VAT, the existing tax system in the country was poor
and inefficient and did not enable the country to respond to major economic difficulties.
However, the introduction of VAT will lead to businesses integrating taxation in their
core business operation, therefore, introducing a new tax system in the country.
o Quality public services and infrastructure: The country is known for its high-quality
public services, which is costly for the government. The country provides people living in
the UAE with various services such as hospitals, public schools, high-quality roads,
police services, and waste management. The mentioned services are being financed by
using the government`s budget, and the collection of VAT revenue will contribute to the
continuous of delivering high-quality public services. (Ministry of Finance, n.d.)

34
 o Improved Liability management: The implementation of VAT will enhance
accountability and liability management. The introduction of VAT means an introduction
of new tax laws and policies, which include the management of an appropriate record of
various types. The new tax laws and policies will lead to proper management of records,
therefore, reducing the risk of fraud and corruption. (Hanafin, 2018)
o Improved business efficiency: The new VAT laws lead to increased compliance costs
for businesses active in the UAE. However, the compliance costs are for the business
itself because the compliance costs are indirect by forcing the companies to update their
business operation to be able to comply with proper documentation of invoices and
records. Therefore, in the long term businesses will benefit from the new changes made
in their operation and will be able to run more efficiently. (Hanafin, 2018)
o Opportunities for professionals: before the introduction of VAT, taxation was not an
important topic in the country. However, the new policies of VAT will allow tax
professionals to find new opportunities and jobs in the market. Businesses will be looking
for VAT professionals to hire, as the topic is new in the country and knowledge about the
topic was not taught in schools and higher education.
o Audit profession: The audit profession will be the biggest beneficiary in the business
industry because the introduction of VAT means an increased need in accounting and
advisory services provided by the audit companies. Also, the introduction of VAT will
lead to increased revenues for the audit industry, as businesses will need experts to
enhance their business operation.

The implementation of VAT in the country is surely going to bring several positive aspects.
Before the introduction of VAT, there was not any reliant taxation system that could help the
country recover fiscal deficits. Also, businesses did not have a need for proper documentation of
their records, especially unlisted companies. VAT is adopted in most countries around the world,
which shows that this type of taxation is very efficient and fit for the modern world.

10.2 The Disadvantages and challenges of VAT

The benefits of Value Added Tax do not come free of charge. The country applied tax to gain
revenue, which means that the burden of this revenue will be placed on someone else. The

35
negative impacts of VAT should be closely monitored by the government in order to minimize it.
The drawbacks of VAT could be summarized in the following:

o Prices increase: The implementation of VAT places the burden on the final consumer to
bear the cost. Prices of most goods and services are now increased by the VAT amount of
5%. Although a rate of 5% is considered low globally, it is still going to cause an increase
in the consumer price index and inflation rates. VAT has been implemented now for
more than 2 years in the country, and currently there are no plans to increase the rate.
o Compliance costs: The new VAT laws and policies led to increased costs to businesses.
Although businesses get a VAT return for the VAT paid, the needs required to comply
with the tax laws are very costly for businesses. Currently, businesses must keep several
accounting records for 5 years, which leads to increased accounting costs and efforts.
Businesses are also required to change their business operation and management in order
to comply with the new VAT laws.
o VAT is regressive: VAT and consumption taxes reflect a flat regressive rate. The
amount of tax will be burdening the poorer and low income consumers more than the
higher income ones (National Retail Federation , 2010). The lower income groups tend to
use most of their income to purchase taxable supplies, therefore being more subject to
VAT. Even in the case of businesses, it was evident that the smaller businesses are more
subject to compliance costs than the bigger ones.

The introduction of VAT can lead to major challenges to businesses, which could lead to
increased compliance difficulties. The VAT compliance is not an easy process and companies
have to spend from their own resources in order to gain the required tools to comply with the
VAT needs. The lack of knowledge is one of the main challenges associated with adopting VAT,
as companies require knowledge in the matter in order to comply (Al-Subhi, 2017). Also, the
topic of taxation is new to the region and many businesses lack the knowledge required to
operate in the new environment. This is why the legal and financial literacy is one of the major
challenges for countries trying to adopt VAT (Bannaga, 2017). VAT will lead to a change in
supply and demand due to the changes in prices, therefore requiring businesses to readjust their
market positioning and develop new strategies.

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11. Research Findings
This research was established to explore the various impacts of the introduction of VAT in the
UAE. The first objective was to identify the impacts of VAT on the economy of the UAE.
Before the application of VAT, scholars and professionals predicted that implementing VAT will
lead to an increase in the inflation rates, which appeared to be true. The introduction of VAT in
2018 led to an increase of 1.1% in the inflation rate in comparison with the period before the
implementation. Also, introducing VAT in the country was due to the need of diversifying the
sources of income. VAT helped the country generate more than 25bn DHS in 2018, and the
country was able to generate a 1.7% GDP growth rate during the same year. These measures
conclude that the introduction of VAT led to more revenue that can help the country to enhance
the economy. In addition, the private consumption expenditure increased massively from 2017 to
2018, which was due to the increase of the CPI because of the introduction of VAT in the
country, and the final consumption expenditure increased by 0.8% after the application of VAT.
People feared and expected that the introduction of VAT will demotivate future investors in the
country, however, the rate of foreign direct investment growth is constant after the application of
VAT, and investors are still seeking business in the country. Other indicators show that the
introduction of VAT led to increasing the number of public revenues generated during 2018,
which as a result increased the governmental spending in the same period. The introduction of
VAT surely had several positive impacts on the economy of the UAE, however, the inflation
rates and CPI increased as a result.

The second aim of the research was to explore the effects of implementing VAT on businesses
active in the UAE. VAT does not impact businesses directly, as businesses get a tax refund for
the amount of VAT paid. However, the indirect impacts of VAT on businesses are a major
challenge. The introduction of VAT in the country brought with it various laws and compliance
matters to ensure the successful implementation of VAT. Therefore, businesses must adapt to the
new VAT systems to be able to operate without the risk of legal issues. The compliance costs
brought by VAT are a major challenge for businesses, as the FTA requires businesses to retain a
huge amount of record for a 5 years period, which makes businesses reassess their way of
managing such reports. Also, businesses must change their way of operation to be VAT friendly,
as every transaction must include new items such as the Tax Registration Number and the

37
calculation of VAT amount. The requirement to provide documents with the tax filing increase
the amount of time needed to comply with businesses, which leads to increased accounting costs
and efforts made by businesses. The topic of taxation is new in the region and businesses must
prepare for the new tax system by implementing new technologies, and providing training
sessions for their employees, or hire new experts that will be able to handle the new tax policies.

The third objective of the research was aimed at exploring the impacts of VAT on consumers in
the UAE. The main impact of introducing a value-added tax on consumers is the increase in
prices. The introduction of VAT at a rate of 5% means that all products and services falling
under the taxable supplies will increase in price by an amount of 5%, which will be the liability
of the final consumer to bear it. Key indicators such as the inflation rate and the CPI showed a
noticeable increase in the periods prior and after the application of VAT. The CPI increased by 5
reaching a measurement of 112 in 2018 when it was 107 in 2017. The survey analysis shows that
most participants are indicating that the introduction of VAT had an impact on their purchasing
decision, and that VAT had an impact on the amount of personal spending. nevertheless, 35% of
the participants declared that the rate of 5% VAT is not fair, and 47.5% of the participants are
against the application of VAT in the country.

Lastly, the final objective was to highlight the advantages and disadvantages of introducing VAT
in the country. There are several advantages of introducing VAT in the UAE such as introducing
a new source of revenue. VAT provided the country with a new source of revenue that could be
used to finance different projects, which was the main reason for implementing VAT in the
country. Also, VAT helped the country implement an efficient taxation system that will enable
the country to respond to economic challenges and provide more options in filling fiscal deficits.
In addition, the country is known for providing quality public services, and the income generated
from VAT could be used to finance the costs of providing public services such as roads, parks,
education, and health system. The introduction of VAT will lead to boosting business efficiency
and provide new opportunities for tax experts and professionals. On the other hand, the
implementation of VAT led to a significant increase in prices and impacted all consumers living
in the country. VAT also burdened businesses with a significant amount of compliance costs and
efforts that must be paid in order to be able to run in the new environment.

38
12. Limitations of the study
There were several limitations of conducting this research paper, these are highlighted in the
following:

o Scarcity of resources: The number of resources and data available about the topic are
very scarce, which limited the possible topics that could have been included in the paper.
Many published kinds of research and studies are very vague and lead to intangible
conclusions, which increased the time needed for data collection and analysis.
o Recency of the topic: The topic of VAT in the country is very recent, which was one of
the reasons why the number of resources was not satisfying. Also, the VAT was
implemented in 2018, and to see the impact of such huge implementation longer amount
of time is needed. In addition, reports are not yet disclosed about the impacts of VAT on
the country and businesses are not yet published, which limited the scope of the research.
o Covid-19: the current Covid-19 situation limited the ability for field studies and
interviews that could have been an option to discover the impacts of VAT on various
types of businesses. Also, the situation forced the use of online tools when conducting the
survey, which limited the number of participants and physical interaction with the
participants.

39
13. Conclusion and Recommendations
Value-added tax is an effective and efficient type of tax that is used globally. Nowadays, VAT is
implemented in more than 160 countries around the world. VAT is an integral part of the modern
taxation system, which indicates that implementing it in the UAE is a step in the right direction.
This paper was focused on highlighting and describing the impacts of VAT in the country using
different types of data and resources. The findings of the paper indicate that VAT impacted the
economy of the UAE by providing a new source of income, and allowing a GDP growth.
However, businesses and consumers are the direct victims of the VAT implementation, as the
prices of products and services are increasing, and the compliance costs are affecting businesses
in the UAE significantly. VAT creates several challenges for businesses in the early steps of the
implementation, as the risk of unintentional non-compliance is likely to occur and might lead to
possible penalties (Bannaga, 2017). The government should be supportive in helping and guiding
businesses to implement VAT successfully, as businesses are considered the tax collection
agents in this type of tax system. Also, the lower-income households will be impacted more by
the introduction of VAT due to the regressive nature of VAT, and the government should keep
an eye on this type of group and develop new plans to support them such as providing tax
exemptions. Several researchers explored this topic; however, their focus was on a single topic.
This paper is inclusive of different aspects of VAT and provides the reader with a broader picture
of the VAT, which gives the reader a solid background about VAT. Future researchers should
focus on studying the real impacts of VAT in the country, rather than focusing on theoretical
impacts. Also, field studies should be conducted to measure the real impact of VAT on
businesses, as the current literature available is focused on conducting interviews that lead to
theoretical findings rather than actual findings. Taxation is a recent topic to the region and is for
sure a major step towards implementing a reliable and effective tax system in the GCC. The
topics of taxations should be taught in schools to set a new path for possible experts and
professionals in the field of taxation. This will lead to a future where the people and experts are
ready to enhance and implement new projects that will allow the country to be less dependent on
oil and diversify its sources of income. In the end, the implementation of VAT in the UAE is for
sure a step in the right direction, which will help the company enhance its economy and fulfill its
vision in becoming a world-leading economy.

40
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 Appendix
Questionnaire

Question 1: AGE

1. Under 18
2. 18-21
3. 22-25
4. 26+

Question 2: How much do you spend on VAT taxable products and services in a month?

1. Under 200 DHS

2. Between 200 DHS and 500 DHS
3. Between 500 DHS and 1,000 DHS
4. Between 1,000 DHS and 1,500 DHS
5. Between 1,500 DHS and 2,000 DHS
6. More than 2,000 DHS

Question 3: Is your purchasing decision impacted by VAT?

1. Yes
2. No

Question 4: Are you aware that there are zero-rated and VAT exempted products/services?

1. Yes
2. No

Question 5: How would you describe the 5% VAT rate?

1. Fair
2. Unfair

Question6: Overall, are you with or against the introduction of VAT in the country?

1. With
2. Against

The End

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