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Dubai: The UAE is likely to introduce a value added tax (VAT) early next year as studies into its implementation have reached an advanced stage, a senior Dubai Customs official said on Tuesday.
The indirect tax on goods and services will replace the existing customs duty, which will be phased out as part of free trade pacts the GCC will sign with a number of key trading partners such as the EU, China and India.
"Having spent two years studying VAT around the world to ensure that what is proposed for the UAE and the GCC is best practice, we are now in phase two, which is looking at how to successfully implement VAT," Dubai Customs executive director Abdul Rahman Al Saleh told a seminar at the Arabian Travel Market.
The infrastructure to levy VAT will be ready by the last quarter of 2008. It will be introduced after the federal government's approval and will be done across the country.
"Most likely it will be in early 2009," Al Saleh said.
He said other GCC states are also expected to adopt VAT after it is introduced in the UAE.
Rate
The tax rate will be between three and five per cent, and initially it will generate about the same amount as collected in customs, he said, but did not disclose Dubai's revenue from customs. Asked if the introduction of VAT would have a negative impact on the booming tourism sector in the country, Al Saleh said "most tourists are used to paying VAT in their own countries." However, tourists would be entitled to claim back before departure the VAT they have paid on their purchases.
Asked if it would further increase inflation in the country, he said the impact is likely to be limited to the first year and thereafter it will "become part of the system."
The initiative is being assisted by the International Monetary Fund (IMF). Dubai plans to spend the money raised through VAT on social services like health and education. Al Saleh promised that with VAT being set at a lower rate than the present customs duties, its burden on people is "expected to be minimal."
While it may be easier to impose VAT on transactions involving physical goods, the government is still unclear about how to bring various types of service under the proposed tax.
"The services sector in general is complicated, and we are reviewing it," Al Saleh pointed out.
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