Is an open-minded policy set out by Maktoum bin Hasher - who came to rule in 1894, and is an ancestor of today's ruler of Dubai - about to come to an end?Sheikh Maktoum did something simple but extraordinary. It was something that, arguably, foreshadowed the booming economy of the UAE today.He abolished taxes. In the late 19th century, it was ruled that almost half the men who worked in Dubai's pearling industry would not pay a dirham - or rather, back then, an Indian rupee - to the government.
Dubai's population exploded. Wealth from pearling flooded into town, with more people working in the industry than in any other Trucial state, and it didn't even matter that they provided just half the income as those in, say, neighbouring Abu Dhabi. The Persians weren't too happy, needless to say. But a business model was born, and, a few years later, commercial taxes were abolished altogether.
Fast-forward 100 years. Dubai has a booming population, a healthy if fledgling international business environment, and no taxes. How history repeats itself.But this could be about to change. The UAE looks set to introduce a value added tax (VAT) on goods. Everyone - from a national to an immigrant worker - will pay a certain amount to the government, probably about 5%, on everything they buy.
A move towards some form of indirect taxation is likely to be replicated in most of the Gulf countries, too.The IMF's Mohsin Khan said earlier this week that "service driven economies such as Dubai and Qatar will be the first to implement VAT, with Dubai already having made significant progress. Taxation is certainly a politically sensitive subject in the Gulf. However, a sales tax is unlikely to attract as much opposition as an income tax." So, hopefully at least, Maktoum bin Hasher's legacy will live on in regard to income tax: the introduction of which would severely damage the economy.However, the introduction of VAT also has the potential to hit the economy hard. Inflation is a serious problem in the region, with the cost of rent and (in Saudi Arabia, especially) certain foodstuffs, soaring. In the UAE, inflation is estimated at above 10%, but is thought to be much higher in booming Dubai. The evolving tax laws must take this into account. The argument is that the introduction of VAT will not hit inflation because customs duty will be abolished at the same time, as the GCC states enter various free trade agreements with other countries.
According to the UAE's Abdul Rahman Al Saleh - the head of the taskforce studying this issue - back in December, the introduction of VAT won't hit consumers or the economy because of this. He also said that the 15% municipality tax - currently charged on hotel and restaurant bills - will be cancelled when VAT is introduced. But the GCC governments should consider exempting certain goods - primarily, essentials such as food and clothes - from the new tax. Otherwise the cost of living could soar to damaging levels. Also, any increase in consumer prices should be carefully controlled. Even if the abolition of customs duty does offset the introduction of VAT, prices have a habit of creeping up when big changes like this are implemented. Witness the introduction of the euro in several countries in the West, which was seen as an opportunity to increase, or at least round up, prices. Source
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