By January 1, 2018, it is expected that value added tax (VAT) will be applied at a rate of 5 per cent on most goods and services in the UAE and wider GCC region.
The GCC governments will face a combined fiscal deficit of about US$350 billion over the next five years, according to the IMF, which bases its estimate on an oil price of $56 per barrel. This means that unless a government finds non-oil revenue to plug its deficit, it will be forced to borrow. VAT is an important source of non-oil revenue as it can bring in at least 1.5 per cent of GDP, or one-fourth of deficit.
While VAT is an indirect tax applied at every stage of the supply chain, the end effect of the levy is on consumers who finally pay the tax while buying a good or service. There are four important stakeholders in this VAT episode – governments (beneficiary), businesses (tax collectors), consumers (taxpayers) and consultants (VAT experts). So the question is who will be affected the most? 
First, let us look at the government that will receive this VAT. Obviously being a beneficiary means that it need not worry about VAT. In fact it should be celebrating. However, as tax administrator, it may have to worry to see that it collects all the VAT that is collectible. It needs to create the necessary infrastructure and manpower to supervise and collect the VAT, and make sure that this does not dent the GCC’s image of a tax-free haven.
Second, consider the businesses that are supposed to collect the VAT and deposit it with the government. They should be the most worried since they will be the ones that have to perform an extra function, which could result in additional hiring and costs, although they do not receive a dir­ect economic incentive. If it is a question of simply collecting and remitting, then it may not be a big issue. However, being in the middle brings several complexities.
Most of the goods and ser­vices consumed in the UAE are imported, mostly from Eur­ope and Asia, and in some cases from other GCC countries. Countries can either exempt certain goods and services (VAT exempt) or can have a zero rate on some products. While exempt categories can remain exempt, zero-rated products can be increased in future. Here comes the problem. What if something VAT exempt in one country need not be VAT exempt in the GCC, and vice versa? Also, what is set as 0 per cent VAT in a recipient country need not be 0 per cent in UAE, and vice versa. So if a good is taxed in the source country and VAT-exempt in the UAE, then businesses in the middle may be stuck in that they may not be able to claim a VAT refund.
For example, goods classified as foodstuffs have a VAT range of 7 to 19 per cent in Germany, 4 to 10 per cent in Spain, and 0 to 20 per cent in the UK.
Meanwhile, for books the VAT is a flat 7 per cent in Germany, 4 to 21 per cent in Spain, and 0 per cent in the UK.
In these cases, companies will have to take a call on either absorbing the VAT (which will reduce the margin) or passing it on to consumers (which will reduce the market share). Such a squeeze can also affect working capital and cash flows. In summary, cost of doing business will go up for companies.

Source: The National