How VAT implementation affects your daily life

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Vat Concept.Word vat put on coins and glass bottles with coins inside on white background.

December 31, 2017, was the last day where residents enjoyed a completely tax-free life in the UAE. On January 01, 2018, a Value Added Tax (VAT) was implemented in UAE. Although the rate of VAT is only 5 percent, it has influenced the overall cost of living in the region. Today, we will look at the ways in which VAT implementation affects your daily life in the UAE.

VAT Implementation in the UAE

The VAT is an indirect tax which is levied on different products and services. Currently, more than 150 countries have implemented VAT at different rates. The primary benefit of VAT is that it generates additional revenue for the government in order to offer public services and maintain civic amenities.

In the UAE, VAT is applied across products and services in three broad categories:

  1. Zero percent VAT – This should not be confused with the VAT-exempt category. The UAE government has decided to charge 0% VAT on products and services which are scheduled for export and international services, investment-grade precious metals, certain education, and health services and supplies. Further, residential properties which are newly constructed and supplied within three years are also charged 0% VAT.
  2. Five percent VAT – This is the standard VAT rate in the UAE which will affect all consumers. The government will apply a 5% VAT to almost all transactional goods as well as services. These include electronics, clothes, food, fuel, communication services, entertainment, etc.
  3. VAT Exempt – The UAE government has decided to provide VAT exemption primarily to corporate businesses since they bear tax costs on their own without passing them to the consumers. Further, first-time property buyers, residential leases, land buyers, and local passenger transport are exempted from VAT too.

Also Read: What is Financial Planning and how to do that?

Effects of VAT implementation on your daily life

Many UAE residents have been concerned about how the implementation of VAT would affect their daily lives. To begin with, let’s understand the fact that the 5% VAT rate is one of the lowest rates in the world. Countries like Sweden, Norway, and Croatia impose a VAT as high as 25%. In UAE, a product or service that you purchased for AED 20 in 2017, will now cost your AED 21 after VAT.

It will be safe to say that consumers in the lower income bracket will not feel the added pressure of VAT since their expenses are usually minimal and on the lower end. However, middle-class consumers (earning more than AED 20,000 a month), who tend to have bloated expenses, are likely to be heavily impacted by this tax. After all, high-end entertainment services, designer products, and other luxury goods and services will now cost more. Let’s look at the effects of VAT on specific products and services:

Utilities and rent

Since rent is exempted from VAT, consumers will not find any changes in rents due to tax. However, utilities like water and electricity will see a 5% rise. Therefore, consumers must add this increase in their monthly budgets.

Transport

Buying a car will become costlier in the UAE. The car prices are already rising and the fuel costs too. With the addition of 5% VAT, it will just become costlier. Additionally, you will have to spend more on your driver’s license, parking, insurance, and car registration. Fortunately, local public transport and international flights are exempted from VAT.

Food and Beverages

Dining at your favorite restaurant or sharing a drink at your watering hole with friends will also get costlier. If you are spending around AED 500 on food and drinks every month, then the addition of AED 25 as VAT might not be too much to handle. However, if you are a foodie and spend say around AED 5,000 a month, then you must prepare yourself to feel the pinch.

Communication services

Communication services also become costlier from January 01, 2018. Mobile phones and phone plans will attract 5% VAT.

Education

There is a mixed bag for parents having children who go to school. The UAE government has exempted tuition fees from VAT. However, textbooks, school uniforms, and trips will all attract the standard 5% value-added tax.

Clothes and Accessories

If shopping was your de-stressing mechanism, then you would want to prepare yourself to spend a little more in order to de-stress. The standard VAT of 5% will be applicable on clothes, accessories, shoes, etc. Probably, it is a good time to keep an eye out for sales or discount offers run by online/offline stores.

Financial Services

Financial services will also attract a 5% VAT. These include bank charges, electronic transfers, etc. Further, you will have to pay a little more to remit funds to your family back home.

Entertainment

Entertainment will be taxed too. Amusement parks, staycations, etc. will all cost five percent more. Tourists will have to pay VAT on their hotel bookings as well as all taxable services and products.

Also Read: Retirement Planning – How Crucial is it?

Summing Up

Overall, VAT will increase the cost of living in the UAE. However, if you plan your finances well, then you can ensure that this tax has minimal impact on your life. It is probably a good time to assess your expenses and create a budget for the month to weed out unnecessary expenses. Remember, a tax of five percent will not break your bank balance and disrupt your life. Not unless you indulge in mindless expenses. Be smart and plan your finances well to overcome this small hurdle.

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