The ongoing political and economic changes in the modern world cause the need to reform the government structure or business within the countries. The fall of 2015 can be characterized by the price decrease in oil production. The side effect can be rather dramatic for numerous countries that are dependent on this resource, and that is, the needed decisions should be made and actions taken to eliminate the negative impact of the significant changes in oil price.
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The United Arab Emirates (UAE) experienced the important economic improvement due to the discovering of the oil resources. The raw material supported the progress in the sphere of living standards and industry development.
However, because of the climate peculiarities, the UAE consumes a lot of energy (air conditioning, water producing). The UAE took the dominant position on the global energy market as according to the OPEC reports, the country increased the oil production while other countries experienced the decline in oil extraction. The impressive economy of the UAE seeks the ways to influence the economic environment of the country.
The discovering of the oil sources transformed the UAE to the economically powerful country; however, the other side of the problem is that oil and gas made the UAE dependent from the sources and can be used by other countries, as the major government revenue is the export of oil. The government of the UAE took certain decisions and actions to eliminate the dependence and reduced it from almost 85% in 1980 to less than 55% in 2005 (Fernandes & Karnik, 2009, p. 138).
The decline in the dependence made it possible to improve the other sectors of the economy in the UAE. The following spheres received the priority, namely tourism, economy, IT technologies, and transportation. The primary purpose of the paper is to highlight the issue with the value-added-tax (VAT) in the UAE, stress the strength and weaknesses of such system, and to discover the alternatives of the VAT that can be implemented in the UAE.
VAT in UAE
VAT is a widespread phenomenon in the modern world. It should be stressed that every economic reform should be carefully examined and analyzed before the implementation as the consequences of the economic changes affect every resident (Ahmad, 2010, p. 229). It should be stressed that the tax-free economy in the UAE is one of the major attractive aspects for the tourists. According to the widespread opinion of the finance experts, the VAT implementation in the UAE possibly can lead to the fact that tourists will spend less while being on vacation. It can have a negative impact on the UAE economy. The government should develop different projects that will allow non-oil sectors to develop.
Possible Effect of the VAT System in the UAE
VAT is rather widespread in the modern world as it can be considered as the powerful economic tool for controlling the economic variables. However, it should be stated that not every developed country implements such tax system. The United Sates and the UAE are the countries where VAT is not used. The unstable condition of the oil market demands urgent solutions. The major export material in the UAE is oil and the decrease in the price of the raw material consequently affects the political and economic strategy of the country.
Although, there is no common idea whether the government of the UAE will keep to the VAT or not, it should be highlighted that the number of business try to adjust to any reforms made in the sphere of tax service as the tense situation on the oil market can be the reason for certain significant economic changes. The consequences of the VAT system implementation will influence the business, and that is, possible difficulties should be taken into account. First and foremost, it should be stressed that changes will have a significant impact on the functioning and the price aspect. The companies will need to reform and review their financial structures.
According to the experts in the field of finance, the Vat system implementation will affect the number of business, namely the sphere of the IT technologies, finance, and strategy (Fernandes & Karnik, 2009, p. 138). The introduction of the VAT system is believed to balance the budget and avoid the severe consequences of the unstable oil market. Although the VAT seems to be a perfect economic solution for the UAE, the new tax is likely to awake the negative reaction from the side of consumers in countries with the higher level of unemployment. According to the experts in the field of finance “the introduction of a low level of VAT in the UAE may create only minor dissent, but in Saudi Arabia (where there is 12 per cent unemployment among locals) the introduction of VAT might cause significant public dissent” (Alshaali, 2015, para. 6).
As the decision regarding the implementation of the new tax system is not taken yet, companies and businesses should not make dramatic changes in their operation and finance structure; however, there should be no doubt that certain measures should be taken to provide better adjustment to the VAT in future. Nilesh Ashar, the member of the KPMG, stated:
Some of these include modeling the fiscal impact of taxes in business plans by making reasonable assumptions, reviewing intercompany arrangements to determine the basis of cross – charges ( or lack thereof), reviewing contracts to assess current position of tax clauses, analyzing financial systems to assess overall readiness, and also reviewing the potential impact of taxes on supply chain and operating structures (Rahman, 2015, para. 7).
The government encourages the companies to stay updated in the sphere of taxes and the effect that VAT may cause for the business plan.
The Strength and Weaknesses of the VAT System in the UAE
The Ministry of Finance in the UAE made an announcement that the reform of the finance structure will be changed and that caused a lot of debates among the specialists. The consumption-driven economy of the UAE has certain peculiarities and should be reflected in the tax system (Alshaali, 2015, para. 2). The deadweight loss is a term in the economics that is used to describe the reduction in the economic index consequently leads to the new tax system or the incensement of the ones that are already used. The deadweight loss is believed to have a greater effect on the consumers.
The implementation of the VAT has certain economic advantages. First of all, it should be stressed that the system has economic benefits to the companies that sell products as they should pay the government the full amount of the sales tax, whereas the company producer is not obliged to do it. The introducing of the VAT will make all the parties to pay the tax equally. The consumers will be also affected; however, the less people buy, the less taxes are paid. The VAT system was successfully implemented in the countries of the European Union and was beneficial for the uniting of the countries.
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Although the stated above benefits of the VAT system show that the new tax system can be viewed as the successful one, experts should pay close attention towards the evident disadvantages of the system. The tax is believed to be a regressive one and affects people with the lower income more. If a person with an impressive budget possibilities spends only 15% of the total income, it means that this percentage will be taxed, whereas people who spend 90% of their income will be taxed on 90%. The other issue with the VAT is that the government should spend a big amount of money to be sure that everyone is paying VAT. That is, the system brings not as much economic profit as expected. The companies who omit to pay VAT lay the responsibility for the taxes on those who pay.
Sanyalaksna Manibandhu is sure that the government should be selective while taking the decision regarding the VAT. The primary disadvantage is that the tax will affect consumers with the lower income and that is, according to the point of view of Sanyalaksna Manibandhu, not all the groups of goods should be taxed. Food should not be the category under the taxation; however, the cigarettes should as the law should not affect poor people. The taxes should be raised from those people who can afford to buy expensive goods (Rahman, 2015, para. 4). With the fiscal deficit because the decrease in oil price the UAE should take the needed measures to eliminate the negative consequences of the tense in the oil market. The country increased the price on the petrol.
To get deeper involved in the issue and to analyze the effects of the VAT it is to examine how the reform in the sphere of taxes will affect consumers. The impact of VAT will vary between the incomes of the customers and their spending behavior (Maceda, 2015, para. 6).
Taking into consideration the purchasing opportunities of the residents of the UAE, the VAT to 5% will be negligible (Maceda, 2015, para. 6). However, it should be stressed that the bigger percentage will consequently lead to the decline in the consumer spending. The deterioration of the buying behavior will cause the industry to decline its production. The taxation on the luxury products will not be dramatic. To save the balance and to secure the families with the low income, the government should keep essential food products away from taxation. Andrew Prince, the expert in the finance states:
If VAT is implemented at low levels, say 3 per cent to 5 per cent on luxury goods such as computers and cars. The impact on low-income families will likely be negligible. But those who regularly purchase the latest smartphone or upgrade their car are the ones to shoulder a greater portion of the burden (Maceda, 2015, para. 6).
The UAE should undergo through certain economic changes to discover new revenue sources and to improve infrastructure. However, another issue with the VAT system is that it will affect tourists who will be obliged to pay taxes twice (in the UAE and their home country) as well. It should be pointed out that the UAE attracts thousands of shoppers across the globe. The major reason is the economy free of taxes and the variety of expats.
VAT and the Economy in the UAE
The Minister of Energy, Suhail bin Mohammed Faraj Fares Al Mazrouei, is sure that the dramatic decrease in the oil market will not have a significant effect on the UAE economy. The UAE Strategy Plan is centered on the improvement of the energy sphere. The government aims to reduce the dependence on the oil and gas and develops the program that will eliminate the connection between the economy and oil extraction. The powerful economic condition prevents the UAE from experiencing the economic difficulties. The pivotal intention of the UAE government is to make the country less dependent from the oil price. The strategy of the government seems to be successful as it reduces the dependence with every year.
Alternatives to VAT System
The major objective of the VAT system is to increase the amount of money received by the government, to avoid the cascading effect, and to provide the stable source of the revenue. Although, VAT seems to solve the issue with the unbalanced finance system, it should be stressed that it will not provide the solution of the core problem. From the one side, VAT is considered to be an efficient tool to implement fiscal reforms, to increase the revenue, and to eliminate the deficit. However, despite the advantages stated above, one should not forget the other side of the problem as VAT is a regressive tax and creates only the money mechanism (Lee, Kim, & Borcherding 2013, p. 541).
VAT will fill the fiscal gap but only by means of taking more money from the public (Paula & Scheinkman, 2010, p. 195). The major alternative of the VAT system implementation is the development of the business and the sphere of industry. The development of the industry will provide people with new job opportunities, will expand the export market, and consequently will stabilize the government revenue.
The improvement of the sphere of business and production will contribute to the independence of the UAE from the oil and gas sources. The other alternative of the VAT is sales tax. The system of sales tax is used in the United States and proves that the implementation of the sales tax can be rather successful for the economy of the country. The primary advantage of the sales tax is that it is more economically efficient than the VAT when it comes to collecting the tax. The system of the sales tax is simple, fair, and provides the government with the additional revenue. Moreover, it should be highlighted that the sales tax affect the consumers with the lower income in a less negative way than the VAT, and that is, should be taken into consideration while making the decision regarding the significant issue of taxation.
In conclusion, it should be stated that the tense condition in the oil market affects the economic and political strategy of the UAE. Although, the country is dependent from the gas and oil extraction, the government takes all the needed actions to reduce the dependence and to improve the living standards of the residents. The powerful economic of the UAE prevents the country from experiencing the severe consequences from the reduction in the price of oil. It should be stressed that the VAT is one of the solutions to the issue of unstable oil price, and it impact on the economics.
However, the government should take into account the strength and weaknesses of the new tax system. The development of the non-oil sector of the economy will have a positive effect on the economy of the UAE. The government should create programs and project to support small business and to develop non-oil sector. It should be pointed out that before the implementation of the VAT system every alternative should be considered and analyzed to omit the negative consequences of the system.
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Alshaali, A. (2015). The pros and cons before UAE gets into VAT mode. Gulf News. Web.
Fernandes, C., & Karnik, A. (2009). Assessing UAE’s oil dependence: An optimal control approach. Education, Business & Society Education, Business and Society: Contemporary Middle Eastern Issues, 2(2), 138-152. Web.
Lee, D., Kim, D., & Borcherding, T. (2013). Tax Structure and Government Spending: Does the Value-Added Tax Increase the Size of Government? National Tax Journal, 66(3), 541-570. Web.
Maceda, C. (2015). How VAT in UAE will impact consumers. Gulf News. Web.
Paula, A., & Scheinkman, J. (2010). Value Added Taxes, Chain Effects and Informality. American Economic Journal, 2(4), 195-221. Web.
Rahman, F. (2015). Low oil prices push GCC to consider VAT. Gulf News. Web.