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How VAT will affect competitiveness of UAE retail sector

The introduction of VAT next year will help the UAE government deliver on its long-standing plans for economic diversification away from oil, while still being able to deliver social and economic programs, Shady Shaher Elborno, the Head of Macro Strategy at the Global Markets & Treasury division of Emirates NBD Bank, has said.

Shady was speaking today at a business breakfast event, hosted by Crowe Horwath audit advisory firm, in Dubai. The firm’s international VAT experts from London and Lebanon are currently in the country, where they are hosting a series of workshops on the implications and the impact of VAT on households’ incomes and the economy, in general.

 
“Exploring taxes as an alternative source of revenue for government finances has always been a very difficult and complex issue for policymakers in the region. After all the region has highlighted a tax free environment as one of the main attractions for businesses and foreign professionals. Yet as the region grows and its economies set a path of divergence from oil dependence, a comprehensive tax system is a key element to allow governments to have more sustainable alternate sources of revenues for budgets,” Shady said.
 

VAT will be a diverse source of revenue for the government, and it is expected to net into the government’s coffers, around AED12 billion in the first year of its implementation.

When analyzing the effects of VAT on the macro economy, the economist stated that there are plenty of aspects to consider, such as the effects on household demand, the distribution of income and the overall economy.

“Ordinarily, the economic performance of any country can be measured and assessed in several ways including the rate of growth of real GDP, the rate of consumer price inflation, unemployment and employment rates, the balance of trade in goods and services and the supply-side indicators such as productivity growth investment and business profitability,” Shady explained.

“At EmiratesNBD Bank, our forecast and assessment in these key critical indicators reveal economic robustness post the countrywide rollout of VAT.”

“Competitiveness of the retail sector is another important element when looking at the application of VAT’s. Our own UAE PMI indices have been showing that since 2009 input costs have been constantly outstripping output costs. This in a sense means costs for business have been rising faster than they can be passed on to consumers. This needs to be assessed against the backdrop of a retail sector in the GCC that is already perceived to be overpriced, especially given the fall in key currencies such as the Euro over the last year.

“Can retailers pass down the cost of the VAT to consumers, and what impact would that have on the competitiveness of the retail sector. Or will retailers ultimately absorb the cost? We believe assessing these factors will be important, and this will involve looking what is driving input costs higher (for instance rents, weak productivity) and looking at how best to mitigate these costs,” the Economist said.

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