Tourism will benefit, some services may become pricier, but if rate stays below five per cent, there should be no inflationary pressure, argue boosters.

No matter that most of the developed world has one, establishing a value added tax (VAT) regime in the UAE is a challenge. It will involve huge investment in terms of VAT infrastructure that will collect and regulate the tax flow. It will need a specialized workforce to inspect and audit. Putting together all these elements is no small job.

The impact on the business community may be harder still. Businesses will be required to follow a stricter and more meticulous reporting procedure and may be asked to file returns more frequently - monthly, quarterly and annually.

"Traders may have a tough time reporting to the authorities, on the tax collected from sales and paid against purchases," says Raju Menon, managing partner, Morison Menon, one of the leading accountancy firms in the UAE. By definition, VAT is tax on exchanges. It is levied on the added value that results from each exchange. VAT is neutral with respect to the number of passages that there are between the producer and the final consumer.

Even as the government is giving the final touches to VAT (the rate is expected to be 3 per cent), the market is agog with reports and rumors that this new tax system will flare up inflation - already giving sleepless nights to UAE residents. Boosters argue that VAT is the most scientific tax collection system and this will only help the UAE make good for the loss it would incur from the abolition of customs duty.

"I'd say VAT will not have any noticeable negative impact on us so long as the rate of tax does not exceed five per cent, which is the import duty being charged now," Menon says. But, he added, in the case of services, the price is bound to go up, commensurate with the rate at which VAT is applicable, as currently services do not attract any type of taxes or duties. But a real concern is that VAT is likely to trigger a fear among the residents that UAE could come up with more taxes in the future.

ANOTHER TAX BURDEN?

For a tax-free country, the are hordes of fees and charges in the form of soaring rentals, visa renewal fees, traffic fines, saliks, parking fees, trade licences and the likes, having had their toll on the financial status of the residents and the businesses alike. The very mention of a value added tax (VAT) has triggered panic among people.

"It is true that the businesses are doing extremely well. But the expenses incurred on my family front as well as my business have surpassed all limits and I don't know how far I can withstand the 'onslaught' from VAT," said an Indian businessman, trading in Deira.

The imminent free trade agreements (FTAs) with India, China and European Union (EU) will inevitably deny the country the customs duty on import of goods from these countries, which now account for a big chunk of UAE's imports. While the non-oil trade between China and Dubai reached about Dh71 billion in 2007, the import from India to Dubai during the first quarter of the current year [2008] crossed Dh214 billion. Importantly, India, China and Switzerland together accounted for 31.8 per cent of Dubai's total imports last year.

As the signing of FTAs is said to be round the corner, the GCC governments including that of the UAE are making all efforts to make good for the possible loss to be rendered by the abolition of import duties, currently charged at five per cent. The VAT is expected to help these countries maintain this revenue.

VAT will not only be applicable to goods but to services also, but the details of the services exempted will be known once the rules and regulations regarding VAT are in place.

POSSIBLY HELPFUL

There is one area which is likely to get a big boost from VAT: tourism. Tourists are entitled to get the refund of the VAT paid within the country [UAE), and they can collect that at the airport while leaving the country. This will prompt tourists to make more purchases in the UAE which has even otherwise been growing as one of the top-ranking shopping and tourist destinations in the world. At present, there is no refund that can be claimed by the tourists on the goods purchased within UAE though the prices are loaded with the import duty at the rate of five per cent.

Menon looks at VAT from a different angle too. While a country is in its growth mode, it needs to develop a well organized and disciplined system that ensures transparency in all areas of financial transactions.

"The VAT system with its inherent pre-requisites of companies having to file all their transactions in a more systematic way, will help establish better reporting culture in the country," he says.

There are risks, however. Several developed countries that have higher VAT rates such as UK have to tackle VAT fraud. The fraudsters generally resort to back-to-back exports and imports in order to pocket illegitimate VAT refunds. "With UAE contemplating a relatively low rate of VAT, the incidence of high level of VAT fraud is unlikely," experts tell The Business Weekly.

Explaining the mechanics of the new tax system, Saad Maniar, managing partner, Horwath Mak, a top-notch accountancy firm, says VAT will be charged to a buyer by a VAT registered seller and this VAT can be reclaimed by a VAT registered buyer after goods and services are purchased. There can be three different rates of VAT - standard, reduced and zero - which apply to different types of goods and services. Some goods and services may be exempt from VAT, while others may be outside the scope of VAT.