Effects of Implementing the VAT Collection System in UAE and Other Countries Around the World

Abstract

In 2003, the countries making up the Gulf Cooperation Council came together to create a free trade bloc in the region. One of the signatories to this trade agreement was the UAE. Among others, the government agreed to introduce a value-added tax (VAT) in their respective jurisdictions to enhance trade and investment in the region. The major objective of this paper was to analyze the effects of implementing this VAT collection system in the UAE and other countries around the world. To achieve this objective, the author used a mixed methodology approach by collecting qualitative and quantitative data. The researcher collected qualitative data using a review of literature available in the area of the research. On the other hand, quantitative data was collected using a self-administered questionnaire. A total of 15 respondents drawn from various sectors in the UAE were used to fill out the questionnaire. It was found that the introduction and implementation of the new taxation regime has far reaching impacts on individuals, businesses, and the government. The legislation is likely to increase the cost of living as the tax burden will be passed down to the consumers. In addition, the cost of doing business in the country is likely to rise. However, the implementation of the VAT system will increase government revenue and enhance public spending. As such, the government will have more money to invest in the country's infrastructure. Based on the findings of this research, it is recommended that the government should consider phasing out other fees charged on businesses, such as license and custom levies. In addition, the government needs to do more to deal with the apprehension expressed by the public towards the new taxation regime.

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Key words: VAT, UAE, impacts of a VAT collection system

Effects of Implementing the VAT Collection System: A Case Study of the UAE and other Countries around the World

Introduction

Background Information

Valued-added tax (VAT) is charged by the government on goods and services produced in the country. It is used as one of the sources of revenue by governments around the world (Bird & Gendron, 2000). Also referred to as a goods and services tax (GST) in some jurisdictions, this source of revenue is assessed on an incremental basis by the government. As of 2018, more than 160 countries around the world had a VAT system in place (Cruywagen, 2018).

The implementation of a VAT system has several implications on individuals, businesses, and governments in countries where the regime is in place (Sharma, 2005). For example, some critics of this taxation plan contend that it places the burden of raising revenue for the government on individual end consumers. Consequently, life may become expensive for the citizen of a country with high rates of VAT (Sharma, 2005). It is also regarded by critics as a regressive form of taxation. To this end, the poor people and low earners pay more compared to the rich. However, this system also has some positive attributes. For instance, it makes it possible for the government to pay for the social services required to improve the quality of life in the country.

Purpose of the Study

The current research paper is written against the backdrop of a VAT system and its impacts in a given country. To this end, the aim of this project is to assess the effects of implementing a VAT collection system in countries around the world. The major focus will be on the impacts of this regime on the UAE.

Problem Statement and Research Questions

Problem statement

In early 2003, the countries making up the Gulf Cooperation Council (GCC) came together to form a customs bloc (Mehrezi, 2014). To this end, the region became a free trade area governed by one external customs tariff. Five years down the line, the GCC took this cooperation further to create a common market. The aim of this collaboration was to enhance investment and trade in the region (Mehrezi, 2014).

To support the free trade agreement and improve investment among the member states, the governments of the 6 countries agreed to put in place a VAT collection system to cover the whole region. According to Thacker (2009), the International Monetary Fund and other global bodies supported the implementation of the VAT regime in the GCC. Consequently, the council reached a consensus that saw the adoption of a taxation regime fashioned along the system used in New Zealand.

The United Arabs Emirates, one of the member states of the GCC, introduced the VAT collection system in 2011 (Mehrezi, 2014). The rate was pegged at 5% and was expected to fully operational by 2015 (Mehrezi, 2014). To enhance the smooth transition into the new regime and support a seamless implementation of the collection system, the government and other stakeholders embarked on feasibility studies aimed at assessing the likely impacts of this policy on the country (Thacker, 2009).

Researchers, analysts, and government policymakers are in agreement that the introduction and implementation of a VAT collection system will have far reaching implications on the economy of the region (Mehrezi, 2014). Among others, revenue collection and distribution of resources in the seven Emirates will be affected significantly by the introduction of the regime. For instance, the government no longer has to rely on custom duties to generate revenue. The impacts should be critically analyzed to assess benefits and costs associated with the implementation of the VAT collection system in the UAE. Some of these impacts can be assessed by analyzing the impacts of this regime on other countries around the world.

Research Questions and Research Objectives

Research objectives

According to Creswell (2014) and Howell (2013), research objectives are the goals that the researcher intends to achieve in carrying out the study. For the purposes of this study, a total of 5 goals and objectives were identified:

Identify and analyze the social, political, and economic impacts of implementing a VAT system in the UAE.

The above was the major objective of this study. The other 4 goals were derived from it and were meant to help the researcher to analyze the issue in detail. The study focused on direct and indirect, as well as intended and unintended effects of the VAT system.

Analyze the impacts of a VAT collection system in other countries around the world.

The experiences of other countries that have implemented a VAT collection system in the world will be analyzed to contextualize the impacts of this regime in UAE from a global perspective.

Assess the various social, political, and economic factors affecting the successful implementation of a VAT collection system in the UAE.

A number of issues, including the willingness and resistance of the populace, affect the successful implementation of taxation regime in most countries around the world. The issues that are unique to the UAE will be analyzed in this section.

Identify and analyze the VAT policy frameworks that are appropriate to the UAE.

The success of various VAT policy options around the world will be reviewed and recommendations made on the ones that are most appropriate to the UAE.

Assess the future of the VAT collection system in the UAE.

Having analyzed the various effects of implementing a VAT collection system in the UAE and other countries around the world, it will be appropriate to analyze what the future holds for this taxation regime in the region.

Research questions

Franklin (2012) and Soeters, Shields, and Rietjens (2014) observe that in most studies, the research questions are related to the objectives. Consequently, the goals of the study are met by addressing the research questions. The following are the research questions for this study:

• What are the impacts of implementing a VAT collection system in the UAE?
• What the impacts of a VAT collection system in other countries around the world?
• What are some of the factors affecting the successful implementation of a VAT collection system in the UAE?
• Which are the VAT policy frameworks that are appropriate to the UAE?
• What does the future hold for the VAT collection system in the UAE?

Plan of the Study

The current study is organized into 5 major sections. The first section is the introduction, which basically introduces the reader to the topic and the research in general. The second section touches on review of literature and information to identify the existing knowledge around the topic of this study. Knowledge gaps will be identified and those that can be addressed using the findings of the current research undertaking mapped out. In this section, a theoretical framework pinning the current study will also be provided. The framework will be used to generate the hypotheses for the research. Section touches on research methodology, while the fourth one deals with discussion and analysis of the findings made. The last section is a conclusion and summary of the entire study, which will touch on managerial implications of the findings made and the limitations of the research.

Literature ReviewLiterature ReviewIn this section, the researcher will present a review of literature existing in the field of VAT collection systems and their impacts on different aspects of life in countries where the regime is in place. As already indicated, the review will help in creating a picture of the status of knowledge in this field and any gaps that may exist, which can be dealt with using the findings of this research.

Negative impacts of VAT collection system

The implementation of a taxation regime is associated with a number of challenges to organizations and firms operating within a given jurisdiction (Carroll, Cline, Neubig, Diamond & Zodrow, 2010). The reason is that, among ot...