Impact of VAT on Consumers in UAE

Value Added Tax (VAT) got introduced in the UAE in 2018.

This means you now pay an extra 5% on most goods and services. But how does this new tax actually affect your day-to-day spending and impact your household budget? 

This up-to-date 2024 guide breaks it down into simple sections to help you understand:

• What is VAT and how does it work
• The categories of goods and services that fall under VAT
• How VAT has increased prices and living costs
• Other VAT costs you may not realize you are paying

Plus, we look at what could happen to VAT rates and impacts in future. Read on for plain English explanations.

What Exactly is VAT? 

VAT stands for Value Added Tax. It’s a type of taxation added onto the existing selling price of most products or services. In the UAE, the current rate applied is 5%.

• Companies add this VAT amount at the point of sale. 
• The extra money then gets paid to the UAE’s Federal Tax Authority.
• This means on any item you buy, you now pay an additional 5% as a form of tax to the government. 

Introducing VAT creates extra income for public spending on infrastructure projects, services and progress across the Emirates. It also brings the UAE closer in line with over 160 countries worldwide that apply a VAT system.

How Does the VAT System Work? 

The VAT system works on a multi-stage model. This means VAT gets paid and collected at each step of production and sales:

• A manufacturer buys raw materials to make products. They pay 5% VAT on those materials.
• The manufacturer then sells the finished products to a retailer, charging 5% VAT.
• The retailer sells the goods in their shops to consumers, adding another layer of 5% VAT.

So by the time an item reaches the customer, VAT has been paid at multiple points along the supply chain. This all gets tracked and accounted for by the Federal Tax Authority. 

What Goods and Services Have VAT Added?

Not all products have VAT added at the standard 5% rate. They fall into different categories:

1. Zero Rated 

• 0% VAT 
• Includes essential food items, healthcare, medicines, education.
• Ensures affordability of basics.

2. Exempt 

• No VAT charged at sale  
• But companies cannot reclaim VAT they paid on inputs.

3. Standard Rated

• 5% VAT rate
• Applies to most goods and services. 
• This now includes retail sales, dining out, leisure activities, electronics, monthly bills and more.

So while vital staples are VAT-free, most things you buy day-to-day now have 5% added onto the usual price.

VAT Has Increased Prices…Visibly and Invisibly 

Previously if you bought a AED 100 toaster, you’d pay AED 100. With a 5% VAT rate introduced, that same toaster now costs AED 105.

Likewise, filling a AED 50 tank of petrol goes up to AED 52.50. Renting a hotel room for AED 500 per night is now AED 525. 

A 5% rise may not seem huge on individual items. But it adds up substantially over the year as you pay more VAT on daily essentials.

Hidden VAT Charges Too

You also pay “hidden VAT” without realising. Companies face new VAT fees on inputs they buy to run their operations. Many pass this expense to customers through discreet price increases.

For example: 

• A cafe now pays 5% VAT on imported coffee beans and milk deliveries.  
• To maintain profits, they cover these tax costs by raising drink prices.
• An electronics shop pays VAT on shipments of TVs and phones. 
• They embed this expense into slightly higher retail prices.

This hidden VAT lurks within most prices you pay. It goes unnoticed rather than being a clearly visible add-on like at checkout.

VAT on Services

It’s not just physical goods that get VAT added. Many services also fall under the standard 5% tax

This includes:

• Phone and internet bills
• Banking charges
• School and university fees
• Gym memberships
• Hotel stays
• Restaurant meals
• Transport and petrol
• Cinema and theme park tickets

Using these kinds of services now costs 5% extra. For a family juggling several monthly bills, that incremental VAT soon stacks up over time.

Another major living cost impacted is housing rents. Landlords now face VAT charges on:

• Maintenance and communal bills
• Property agent fees
• Ownership transfer charges

Most landlords increase rental rates to cover these new property VAT costs. This adds further financial pressure, especially in high-priced areas.

For example, an Apartment renting for AED 50,000 annually would rise to AED 52,500 with VAT passed on.

Adding Your VAT Spend Up

In total, the average UAE family now pays an extra AED 1,500-2,500+ per year thanks to VAT. Much of this comes from increased prices on frequent grocery shops, petrol stops and meal purchases.

While each 5% VAT charge seems tiny, together they strain wallets and reduce disposable income that could be saved or spent elsewhere.

Could VAT Increase Further?

Global VAT or sales tax rates range from 15-27% – much higher than the UAE. This suggests there is scope for a future rise beyond 5%, perhaps matching Saudi Arabia’s 15% VAT introduced in 2020.

For now, 5% allows a gradual acclimatisation to this new tax. But over coming years it may creak up to bring in greater revenues as government spending and development projects accelerate.

That means the impact of VAT on consumers could grow. More of your hard-earned cash will end up going towards taxes on everyday costs. Carefully managing budgets will become even more critical.

Conclusion

VAT in the UAE has added 5% onto the cost of most goods and services. This generates extra income for infrastructure and public services. But for consumers, it also increases living costs.

Families now spend hundreds or thousands of extra dirhams every year on regular purchases. While each little VAT payment seems tiny, together they strain personal budgets.

So VAT helps facilitate exciting national progress. But comes at a price for households through elevated everyday expenses.

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