This year, value-added tax (VAT) was introduced to the United Arab Emirates (UAE) on the 1st of January 2018.
Currently, there are more than 160 countries around the world that use VAT. After the introduction to the UAE, the estimated income to be gathered from VAT has been set around 12 billion dirhams – approximately £2.5 billion this year alone.
For a long period of time, Gulf states have attracted foreign workers due to the tax-free benefits offered, but now the UAE and Saudi Arabia are ending the era of tax-free living and the impact on those relocating to the area could theoretically plummet. Items that have had VAT applied to them include, petrol, diesel, food, clothes, utilities, hotel rooms and cars. One of the biggest concerns for the introduction of this tax is the impact it will have on both purchasing power and the overall cost of living.
Garbis Iradian, Chief Economist MENA, Institute of International Finance has commented on the new tax introduction stating ‘we expect a one-off inflationary impact from VAT. In the UAE, authorities estimate that excise taxes and VAT will add one percentage point to headline inflation.’
However, as well as the one-off inflation there is also concern for the future. VAT rates aren’t set in stone and a number of UAE companies are worried that the rate might rise in the coming years. This creates concern for both businesses and consumers, as prices could be expected to rise across all sectors.
VAT and the Automobile Industry
In 2017, the automobile industry was facing challenges of having excess inventory, with their being more supply than demand for cars. Margins are already being hit hard, but the introduction of VAT will hit margins even harder.
Owning a car in the UAE is already difficult with the expense of fuel, insurance, parking and maintenance. However, it’s now going to be even more difficult with the introduction of VAT – an additional 5% tax charge will be added to the transaction price of car purchases.
Although this VAT rate is low compared to other countries, the region has a strong liking for purchasing expensive vehicles, therefore the new tax has increased the nominal price of these luxurious cars.
How will this affect car sales?
Car dealers were keen to sell as many cars as possible before the January 1st deadline and were busy with attractive sales campaigns to help move their 2017 models and pre-owned cars before the start of 2018.
However, the application of VAT will depend on whether they are buying from the agency, dealer or directly from an individual owner. If they are purchasing a brand new car from the agency, or a preowned car registered under the agency or dealer, then the 5% VAT charge will be added onto the car’s value.
It could be said that the increase in VAT will lead to a higher demand for second hand car sales. Even the importation of a car will have an import VAT when it is entered into the ‘free circulation’. The introduction of this new tax is certainly going to impact the automotive industry in the country.
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