Under the new system, school fees will be exempted, while there will be VAT on water, power, food and jewellery from next year. However, the experts believe that it wold be affordable to the residents.
“Most food staples have a price elasticity of demand ranging from 0.20 to 0.80 in demand. This means that staple food items are generally price inelastic. So when you regularly purchase an item for Dh20 and now see it priced at Dh21, it is unlikely that consumers will think twice about buying it especially considering that the bulk of food items in the UAE are imported and prices fluctuate regularly,” says Dr Sanjay Modak, Visiting Professor of Economics at the Rochester Institute of Technology.
He also added that it is better to implement the European way and include the VAT in the price you see on the shelves and not add it at checkout as it’s done in the US.
A VAT rate of 5% for food is low when compared other countries. For instance, in Europe, rates range from 15% in Luxembourg to 25% in Croatia. Japan has a consumption tax of 5% and Singapore has a GST of 7%. Canada has 5%.
The new system will also charge VAT of 5% on gold jewellery, the tax will be on the whole piece rather than on the making charges.
Khalid Al Bustani, director general of Federal Tax Authority, on Wednesday, said tourists would get refunds on their purchases at the airport while returning to their countries. He said the authority is working with the parties involved and is expected to roll out the plan before January 2018.
Meanwhile, higher education institutes that are more than 50 percent funded by the government will be exempted from VAT.
Surandar Jesrani, partner and CEO, Morison MJS, says education services will be exempt if run by a recognised institution and offers a recognised curriculum.
“In the case of higher education institutions, it should either be owned by the federal or local government, or receive more than 50 per cent of its annual funding directly from the Federal or local government,” he said.
“We expect that tuition fees, study material (books), medical fees, registration fees, admission fees and exam fees will be 0 per cent,” he said.
Free zone companies buying goods and services from outside the zone will be charged.