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UAE. Dubai Customs said today that implementing VAT in the UAE and GCC region, in general, would have a significant positive impact on strengthening the economy, raising current living standard.
Abdulrahman Al Saleh, Executive Director of Corporate Support Sector in Dubai Customs said that the statements of the International Monetary Fund about inflation increasing by 2% after the implementation of VAT in the UAE and GCC were based on personal speculation. This does not reflect the report’s advice of the IMF on VAT implementation in the UAE, he said.
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% to 2% if it was implemented in the UAE and the GCC countries. Khan said: "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 increased inflation resulting from the implementing of VAT. However, such comments have presented it in a positive manner, said the Dubai Customs statement. “In all countries the adoption of VAT and its impact on retail prices is a source of concern for 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 this may lead to a change in relative prices," Al Saleh said.
Consequently, Al Saleh said he deemed Khan’s statements as being incompatible with the IMF report which praised the VAT regime, stressing on the necessity of an immediate implementation to strengthen the UAE economy, to offer more fiscal tools to the government, and varied revenue streams.
"It is well known globally that implementing VAT in many countries has significantly contributed in boosting the economy’s sustainability, as VAT is considered the ideal tax for already strong economies. While the UAE seeks to strengthen and diversify its economy, the country will not be an exceptional case in this regard," Al Saleh added.
Studies conducted by Dubai Customs indicated that the rise of inflation rate in the Emirates would not exceed a one-year-diminishable 0.5% when VAT is introduced, mainly because VAT will be a blanket rate of between 3% and 5% only.
Apart from that, VAT is going to replace the current customs duties amounting to 5%, thereby it is expected to support the current price levels and mitigate the rise of the inflation rate. These positive consequences are well evident in the majority of the 141 world economies that have implemented the VAT system.
IMF has recently reported that, "the evidence from countries that have introduced VAT suggests that in the majority of cases there was no or only a minor increase, and in some cases even a reduction (in Turkey and countries), in the general price level associated with the introduction of the VAT. This reflects 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 one percentage point and only in a few cases was the contribution to price increases greater than this."
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