VAT and trade pacts clash

Emirates Business 24/7 | Sunday, July 13, 2008

VAT and trade pacts clash

By Mohammed Elsidafy

Imposing a value added tax (VAT) on GCC and Arab products in the UAE would be against the agreements signed by the country with other Gulf and Arab states, according to the Ministry of Economy.

Dubai Customs had recently announced that the federal government intends to replace the current custom tariffs with VAT.

Emirates Business has learnt the Minister of Economy, Sultan bin Saeed Al Mansouri, has sent a memo to the Minister of State for Financial and Industrial Affairs, Obaid Humaid Al Tayer, protesting the announcement.

Al Mansouri based his protest on the fact that the imposition of VAT would conflict with commitments and free trade agreements signed between the UAE and other GCC members, as well as with the rest of the Arab World.

The agreements do not allow the imposition of taxes on Gulf and Arab products, in accordance with the decisions of the General Secretariat of the GCC and similar decisions by the Arab League.

Al Mansouri also based his argument on the fact VAT would contradict Federal Industrial Law No.1 of 1979, which exempts locally-manufactured products from taxes. A Ministry of Economy official, who preferred to remain anonymous, said Dubai Customs officials are not authorised to announce such federal matters, which interfere with the state’s powers and its functioning, as well as its relations on the international level. He said the customs officials were local officials, who implement federal and local legislations rather than enact the laws.

"Such decisions should have been announced by federal bodies, such as the Ministry of Economy or the Ministry of Finance. Otherwise, we open the door for any local official to announce what he likes regarding decisions that are beyond his powers," the official said. He said such statements might cause confusion and lead to serious economic consequences - like encouraging greedy traders to raise prices of their products with the imminent imposition of the VAT as a ruse - at a time when the government was making efforts to curb inflation. It may also prompt investors and manufacturers to leave the UAE for other countries, he added.

"Supporting the national economy and increasing the government’s revenues does not come from the imposition of a tax but from improving the quality and quantity of the gross national product," said the official.

Queries have come from various quarters of the economy about the impact of VAT on investment opportunities in the UAE and how the returns would be distributed to local governments. In June, Ahmed Butti Ahmed, Director-General of Dubai Customs, and Abdul Rahman Saleh, Executive Director of Corporate Support, had announced the federal government’s intention of introducing VAT.

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