The introduction of VAT is just one of the many fiscal strategies that will enable the UAE to achieve its medium to long-term objectives to become an economic powerhouse and world-class business hub.

A VAT system by its nature is a flexible tool for governments to regulate their annual budgets, contributing to higher revenue intake and a healthier ability to influence economic growth. This is evidenced in numerous OECD, IMF and domestic Central Bank financial and economic reports. These indicate significant increases in tax-to-GDP ratios as a result of the introduction of a new VAT regime and/or the fluctuation of rates within mature regimes.

The UAE and indeed the GCC’s rationale for the introduction of VAT, together with the related revenues it hopes to generate, give some context to our consideration of whether it has impacted activity in the region, and in particular the construction industry.

VAT has the essential characteristic of an economically neutral tax—ie, it flows through businesses and tax supplies to final consumers. Once a new VAT system has been introduced and businesses have adjusted, VAT should not be a direct cost for businesses and careful management of associated compliance, cash flow and administration costs should limit the indirect impact. Associated inflation is also generally short lived.

For a VAT regime to be successful in its aim of neutrality for businesses, and therefore limit the impact on trade, there are a number of key contributing factors: the VAT rates and structure; VAT thresholds and phased introduction; administration of the system; and exemptions.

Transitional challenges
If we look at these in the context of the construction industry, they give us a clearer picture of some of the challenges that businesses may have faced during the first year of implementation in the UAE and Saudi Arabia, and the resulting impact on the industry across the region.

For such an important, high-value sector, the application of a considerably low rate of 5 per cent was crucial in aiding the industry to adjust to this new demand on working capital. Also, the implementation of a simple VAT system was tactical in supporting comprehension and early adoption, especially in the UAE where businesses did not historically have experience with federal tax regimes.