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Assignment focuses on the UAE's economy & effect of VAT on its business by studying various philosophies for the same.

Home, - How VAT effect the UAE economy & Business

Introduction 

The economy of the UAE is extensively relied on the petroleum oil, and is the most diversified among the GCC (Golf Corporation Council) countries. The nation is considered to have a low cost jurisdiction. The people have enjoyed the benefits of tax-free system, until 2018. With the implementation of VAT an overhaul in the socioeconomic, business, political, and other aspects of the country have resulted significantly. In this research critical literature review encompassing the positive and negative impacts of the implementation on the economy and businesses of the UAE will be. The study will contain discussions supported by various journals, websites, and research. The arguments, understanding, and knowledge that will be developed in this research project will enable the learners to apply these in accomplishing a successful literature review. It will highlight the suitable research philosophy that complements with the study. Finally, it will briefly highlight the limitations of this study.  

Literature Review 

The economic policies of UAE were exempted from VAT (Valued Added Tax) System for many years, and the people and immigrants have enjoyed living tax free system. The circumstances have changed from 2018, when the government of the country has implemented 5% VAT to raise revenue. This is due to the reason of lowering oil prices all across the world. The decision was made in 2011 from the government itself by studying social, economic, and political consequences. Several studies and analyses have been made on the implementation of the VAT system in the country, and the reviews are mostly mixed. However, the VAT system can improve the economic system of the country significantly, but it also creates the issue of tax evasion as reported by (gulfbusiness.com 2018). Tax evasion refers to the process of exempting from tax bracket with the intention of cheating the country’s legislation. This tax evasion in other countries has taken substantial shapes, decreasing the economy of the nations. Businesses generally exercise tax evasions by adopting schemes or arrangements. Every tax evasion is illegal. Therefore, it increases the risks of a tax fraud whose impact can lead to the downfall of the country's economy. VAT in UAE is 5% and is exempted from 100 essential food items, health, education, transportation and social services. 

Regarding socioeconomic impacts of the VAT, several researches have made promising study and analysis which aid to reflect on the future consequences in a broader way. With the reports from (canberra.edu.au 2018), 5% VAT rate will increase the general price level to a reasonable extent and is parallel to the increase in inflation of 0.4-1.4%. The report chalked out different factors that determine the rise in inflation of this particular aspect. It is also implied to the other government policies such as fiscal and monetary. With the increase of 5% VAT, the GDP is expected to increase between 0.2-0.4percent however it also depends on the types of commodities and services on which the VAT is exempted and the businesses the VAT is included. 

According to the study by (Whitehouse and Nurmi, 2016), about the distributional influences among household people of different ethnicity, income levels, and emirates. The western households were least likely to be affected. The impact is regressive and disproportionate to lower income household and in the smaller emirates. However, this can be mitigated effectively by the devious use of the social security budget. The negative impact on the smaller emirates can be balanced with this budget. The table below shows the contribution of each emirate to the GDP of UAE.

 

Table 1: The contribution of each emirate, except Abu Dhabi in the year 2003, 2005 and 2007 to the UAE' GDP respectively

(Source: canberra.edu.au 2018)

The impact of VAT will significantly affect the sustainability and economic development of RAK (Ras Al Khaimah) industries, as analyzed by the researchers. Some of the key industries are Heavy industries (construction, cement), Real estate, Tourism, and free trade zones. The analysis of the mentioned industries is done below. 

Heavy Industries

It is certain that the heavy industries require huge financial investment, thus the issue of sustaining VAT by the heavy enterprises at the beginning of VAT establishment is a major concern for the enterprises. It could impact the export business attributed to the sector, as they will be in a state of refund considering the exports are zero-rated. In this time risks related to cash flow is attributed to the heavy industries. In order to cope with this issue, the refund process of VAT should be tackled with the assistance of tax authorities and appropriate procedures for risk management. 

Tourism 

In many GCC countries, the export of services and products in international context with the application of zero rates is implemented. This zero-rating in various aspects of tourism like transportation, food and drinks, has made the destinations of RAK an attractive location for the tourist for enjoying holidays and leisure. The Free Trade Zones qualifies the beautiful aspect of tourism business, where VAT is exempted. Thus, it facilitates the tourism business to a great extent. The price levels should be standardized in luxury commodities in order to attract tourist and sustain the industry (Delgado, 2016).

Some certain negative impacts on the economy of UAE are illustrated below (entrepreneur.com 2018).

Cost Increased- With the implementation of the VAT system, businesses need to incorporate new departments which will lead to increased cost. It is essential as the VAT system is complicated, and need to abide by the guidelines of the law. For which, sound knowledge in taxation, updated IT and the internal system is required to make the evaluation correctly.  

Changing business structure- Since it is a consumable tax rate, it is charged at each operational stages of a business. This will create problems in the administration of the business, especially when more than one business is dealing especially the same products or services. It is evident, that instead of paying VAT at each sequence it is better to collect them at a single point and quantify them. It raises issues in improper computation resulting VAT leakage. 

Low cost jurisdiction- Emirates was an epitome of low cost jurisdiction, since the cost of administration; production and maintenance of commercial enterprises are relatively low as compared to other countries. It is expected that VAT 199 can increase the one-off inflationary effect that will result in the increase in the general price of the goods. Thus, after the establishment of VAT, the low cost jurisdiction should be made in the country, especially in RAK. It involves exempting VAT from sales and rental of residential estates, also leasing office building (Mears, 2016).

Some positive impacts of VAT on the economy of UAE are described below. 

Increasing government budgets and funds- The VAT will make a substantial change in the revenue system of the country, boosting funds of the government. According to the statement made by the Ministry of Finance’s undersecretary, the country will have a more stable economy benefitting the local business significantly. 

In the development of infrastructure- With the development of infrastructure will enable the entrepreneurs to do business easily and in a less expensive manner. Infrastructural development is strongly related to the economic development of the country due to multiplier effects. The other positivity in accordance with this issue is that this value creating tax strategies will give competitive advantage, considering all the six GCC countries will implement the same (thenational.ae 2018).

Non-financial benefits- The implementation of VAT system will bring on several non-financial benefits, such as enhancing in liability management, government accountability, and democracy. 

Improved business efficiency- At the initial stage, business may see rise in costs attributed to manufacture, distribution, and sales. Whereas, thinking on a long term perspective, it would certainly fetch benefits to the businesses of the country. It would certainly disrupt the orthodox, outdated accounting systems.  It is presumed, with the adjustment of VAT-compliant systems, the cost of software or apps even for smaller companies will be low, making a path for long-term benefits (Worku and Rao, 2018).

The studies from researchers on the impact of VAT in the context of Islamic Finance, is that the government will decide on developing a way between conventional finance system and Sharia Law. Islamic finance is referred to the financial rules of Shariah Law, that deals with the daily aspects of life, not only money for Muslims. It prohibits all kinds of trading debts and loans. The government will ensure to accomplish their objectives regarding the decisions made abiding the Shariah Law (Ercanbrack, 2014).

Research Philosophy

Research philosophy is defined as the belief regarding the ways that enable in the collection, analysis and utilization of the collated data in a research project. In modern science two major research philosophies are identified and used in making research analysis, these are positivism and interpretivism (Hughes et al., 2016).

Positivism- It is the philosophical stance essential for the natural scientist and works incorporating with the observation of social reality to develop constructive law-like generalizations. According to Positivists, the reality is fixed and has different perspective creating a clear description. It requires an extensive study of the interfering phenomenon, and positivists believe in isolating the phenomena, repeating the observations (Alvesson and Sköldberg, 2017).

Interpretivism- It is for the critique of positivism with subjective perspectives. It states that the physical phenomena of humans are different and make significant meanings of it. The analysis of these meanings is the tasks of interpretivists. 

In this study, secondary research method with positivism research philosophy will be used. The research technique will be qualitative since positivism philosophy reflects on the issues of this study allowing the positivists to have proper insights. The qualitative technique is attributed to the research on understanding the underlying reasons of research problems (ncbi.nlm.nih 2018). It involves questionnaire to eminent people through interviews. With relating to positivism, qualitative is the most suitable method as the former deals with the observation of social reality. In this study, eminent scholars, economists, business experts, financial analysts, will be interviewed to gather information regarding their opinion about the positive and negative impact of VAT in the country’s economy and businesses. 

Gap in the Literature Review 

From the above discussion, analysis has been drawn on finding the right implication of VAT system. Despite of making a comprehensive study highlight both the positive and negative impacts of the system, limitations lie in finding the right solutions to overcome any economic crisis that may occur in between and eventually. For example, a global recession where businesses are bound to face a hiatus in their growth and face risk of sustainability or tax evasions that have been mentioned in the literature review. Thus, it can be understood that the analysis is more of a theoretical based considering the situations of the country to be fixed, making it hypothetical to some extent. Though, the literature review consisted the opinions, viewpoints and analysis from eminent scholars and journals but it involved nothing about the awareness of the consequences of VAT among the common people of UAE. The gap lies in mentioning the viewpoints of the CEOs and managers of large enterprises of the country about the initiative of disrupting tax-free system. It did not include any preparations or initiatives take by SMEs in order to change their business operations. The opinions of religious delegates regarding this are also exempted from this literature review. The limitations that are concluded in this research project will be used to overcome in the next one.  

Conclusion 

The literature review made a critical analysis on the various positive and negative impacts of the implementation VAT in the economy of UAE and businesses. It found that it would increase price of commodities, business operations and current inflation rate of the country.  The discussion looked into the impact of it RAK industries, like heavy industry and tourism sectors. The tourism sector will be benefitted significantly with the zero rating policy. It included the governmental initiative in developing economic policy merging Islamic and conventional finance system. Regarding the analysis of research philosophies both positivism and interpretivism. It has concluded that secondary research method with the application of qualitative research technique will be appropriate for conducting the research. It justified the relation of qualitative technique and positivism philosophy with the relevance of this study. Lastly, it highlighted some of the essential limitations in the literature that would help the learners to correct in the next endeavour. 

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