Dubai biggest beneficiary of VAT revenue

Dubai was the largest beneficiary among the seven emirates in value-added tax (VAT) collection last year, receiving 42 per cent or Dh11.34 billion of the Dh27 billion total, Moody's Investors Service said.

Data from the global ratings agency showed that the federal government will retain 30 per cent, or Dh8.1 billion, of the collected revenues while the remaining Dh18.9 billion, or 70 per cent, will be divided among the emirates.

After Dubai and the federal government, Abu Dhabi will receive 18 per cent (Dh4.85 billion). Sharjah will get 6 per cent (Dh1.61 billion) and the Northern Emirates will receive 4 per cent (Dh1.1 billion).

The UAE levied 5 per cent VAT on selected goods and services from January 1, 2018, in order to boost revenues and diversify economy away from hydrocarbon dependence. The Federal Tax Authority collected Dh27 billion in VAT revenues in 2018, surpassing its 2018 target of Dh12 billion and even the 2019 target of Dh20 billion.

Thaddeus Best, analyst at Moody's Investors Service, said the UAE surpassing its 2018 VAT collection target by 125 per cent is credit-positive for the country.

He said that although the standing populations of Dubai and Abu Dhabi are fairly similar, Dubai benefits from a much higher tourism spending and a higher daytime population as workers commute in from other emirates. The additional VAT receipts should help offset some of the losses to government revenues from the reduction in service fees that the government of Dubai recently implemented as part of its efforts to stimulate the economy in the face of decelerating non-oil real GDP growth.

Naveen Sharma, head of the Accounting, Audit & Advisory Services Focus Group at the Indian Business and Professional Council Dubai, said VAT collection will increase for the current year as well due to a high compliance ratio and increased spending for Expo 2020.

"I think the UAE will collect around Dh40-Dh50 billion in VAT for this year. The economy is growing rapidly as the UAE government has taken a number of economic measures that will result in an increase in VAT collection," Sharma said.

Pratik Shah, partner at WTS Dhruva Consultants, said VAT collection in 2018 included tax on transition contracts and arrangements apart from the supplies undertaken in 2018, and this is one of reasons that VAT collection crossed the estimate.

"While the 2019 revenue collection would not have VAT on transition contracts, a potential increase in revenue collection could be expected due to changes in the tax position/transactions on which VAT is unpaid in 2018 as majority of the companies in UAE are re-evaluating the position taken at the time of VAT implementation."

In addition, the UAE's GDP is expected to grow at 3.5 per cent in 2019 as compared to 2.8 per cent in 2018, and impact of the increase would have a positive impact on the revenue collection, he added.

"Overall, expected VAT collection could be in the range of Dh30 to Dh32 billion in 2019. In addition to this, there would be excise tax collection and potential penalty collection on account of delay in payment of taxes, filing voluntary disclosures, delay in registrations/filing returns, etc. One may need to see the impact on the revenue collections considering the refunds to be disbursed by the FTA in 2019," Shah added.

Best said given this high level of compliance in the first year and Moody's expectation for non-oil growth to remain subdued, it does not expect a significant increase in VAT collections in 2019. It will nevertheless be higher than currently budgeted.

first published in the Khaleej Times on 1 July 2019