Economics of VAT in UAE

Abstract

A new era is going to start in the UAE with the introduction of Value Added Tax (VAT) in the economy. A truly global economy which is doing better than the best for its growth and development. So there are certain questions regarding VAT as what is VAT, its implementation and its importance in the economy. As the UAE government is working towards the implementation of VAT in the first quarter of 2018.

Firstly let’s talk about the Value added Tax (VAT), which is also known as Goods & Service Tax (GST) in some economies. The VAT is a tax which is assessed and collected at every loop of the sale and purchase in the market chain. Under this system seller works as a link between the buyer and the government, which collects tax (calculation of tax amount is based on the value addition to the good) from the buyer and handling over to the government. Here one thing we need to understand that although VAT seems same as Sales tax but it has a different mechanism, as VAT is collected at each step of the production process by the seller from the buyer where as sales tax is levied on the total value of the commodity. VAT is generally added in the shelf price of goods, so consumers or sellers are not supposed to make any extra calculation for assessing the price to be paid. All the countries which are using VAT have different rates and different slabs for varying categories of goods. To understand the concept of VAT in a lay man’s language, let’s consider the production process of tea, where with the transfer of tea leaves to different levels it gets value addition in the process of cultivation, processing, packaging, transportation and marketing, which adds value to the leaves of tea garden and all these work does require funds, which multiplies the goodness of the product as well as adds the value to the product. One thing we need to consider is that the VAT is paid at each level of this production process and being reimbursed by the next buyer in this cycle.