The question of who bears the burden of VAT is a controversial one in countries that have mature tax systems. For example, does a cut in the rate of corporate income tax increase returns to owners of capital or providers of labour? Labour parties will say it increases returns to capital, capitalists will say it increases returns to labour. The truth, as is often the case, is likely to lie somewhere in between. Economic theory suggests that the burden of VAT, being a consumption tax, will be suffered by consumers, and the evidence, although surprisingly patchy, does generally tend to support this view. VAT is certainly a regressive tax, in the sense that a greater proportion of the income of poorer households is eaten up by VAT, as poorer households tend to need to consume a greater proportion of their income than richer households, who tend to be in a position to save more. The correlation is illustrated particularly strongly by the impact of VAT imposed on food. One particular study from September 2016, Incidence and Distributional Effects of Value Added Tax by Ingvil Gaarder of Chicago University – suggested that VAT on food is almost always borne by the consumer, whereas VAT on other items would not necessarily be passed on by the retailer. My guess is that the burger that cost me Dh50 on December 31 will cost me at least Dh52.5 on January 1. The UAE could have “zero rated” (ie imposed VAT at the rate of 0 per cent rather than 5 per cent) certain basic foodstuffs to reduce the affect of VAT on poorer households but it chose not to. That is sensible from a design point of view: Jaffa Cakes, smoothie juices, burritos and Pringles have all been the subject of litigation in the UK as to whether they should be zero or standard rated for VAT purposes, a delight that the UAE courts won’t experience. But there is a significant knock-on economic effect, and it is unusual for a country to subject all food to the full rate of VAT. Abu Dhabi Commercial Bank has estimated that the introduction of VAT will result in a one-off increase in inflation of 2.7 per cent to 3.7 per cent, but I expect a one-off increase in food inflation of at least 5 per cent. Advice to readers: do a big grocery shop on December 31.
Who will bear the burden of VAT in the UAE
08 Oct, 2017 | Posted by Admin