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Abu Dhabi, UAEThursday 19 April 2018

Business comment: Apprehension over VAT effects on living costs will be short-lived

Despite households worrying about higher household spending, many are adapting their budgets to cover any shortfall

Introduced one month ago today on January 1, VAT has had few teething problems, but that way, it's easier to identify the areas that need work. Silvia Razgova / The National
Introduced one month ago today on January 1, VAT has had few teething problems, but that way, it's easier to identify the areas that need work. Silvia Razgova / The National

Nearly two weeks into the new year and UAE residents are feeling apprehensive about how VAT will affect their finances.

According to a survey released this week by yallacompare, a price comparison website, 45 per cent of those polled were “worried” about the impact of the tax being added to products.

It’s only natural for residents to be concerned about how the new tax will hit them in the pocket. As with any federal policy change, people need time to adapt and time to assess exactly how their personal finances will be impacted.

But it will take weeks, if not months, before households can truly measure whether their living costs have gone up.

Just over half of those surveyed admitted they were only “slightly worried” adding that they did not expect to feel “many effects”.

Others expect salary increases to offset any impact from the tax on their household spending, with 63 per cent of those surveyed expecting a raise to soften the effects of the tax.

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Read more:

Almost half of UAE residents worried about increased living costs from VAT

UAE residents cut back ahead of VAT introduction

UAE salaries: VAT set to eat into pay rises, new report says

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However, according to a study released last week by the human resources consultancy Korn Ferry Hay Group, salaries in the UAE are expected to rise 4.1 per cent this year but after factoring in an expected inflation rate of 4.6 per cent, they will on average contract by 0.5 per cent.

That figure assumes residents won’t make lifestyle cutbacks to ensure they are not worse off. Many have already shared their strategies with The National on reducing their outlay to ensure any rise in costs due to VAT do not skew their household budget. Holidays or dining out are just some of the luxuries that some frugal households have chosen to reduce.

The yallacompare study reflected this by revealing one in three UAE residents put off big purchases, such as cars or houses, in 2017.

At the same time, it is clear many feel everything will return to the status quo with one in four expecting to make a big purchase this year.

You only need to look to developed economies such as the UK and France, where the standard VAT rate sits at 20 per cent, to see how residents learn to accept the tax as the norm.

A settling in period is to be expected, as households adjust their budgets to factor in VAT. Then, once the benefits of the tax’s implementation are realised - such as higher spending on infrastructure projects and government services - the apprehension currently experienced by some will soon edge away.