Dubai – the biggest beneficiary of VAT revenue
Dubai was the largest beneficiary among the seven emirates in value-added tax (VAT) collection last year, receiving 42 per cent or Dh11.34 billion of the Dh27 billion total, Moody’s Investors Service said.
Data from the global ratings agency showed that the federal government will retain 30 per cent, or Dh8.1 billion, of the collected revenues while the remaining Dh18.9 billion, or 70 per cent, will be divided among the emirates.
After Dubai and the federal government, Abu Dhabi will receive 18 per cent (Dh4.85 billion). Sharjah will get 6 per cent (Dh1.61 billion) and the Northern Emirates will receive 4 per cent (Dh1.1 billion).
The UAE levied 5 per cent VAT on selected goods and services from January 1, 2018, in order to boost revenues and diversify economy away from hydrocarbon dependence. The Federal Tax Authority collected Dh27 billion in VAT revenues in 2018, surpassing its 2018 target of Dh12 billion and even the 2019 target of Dh20 billion.
Thaddeus Best, analyst at Moody’s Investors Service, said the UAE surpassing its 2018 VAT collection target by 125 per cent is credit-positive for the country.
He said that although the standing populations of Dubai and Abu Dhabi are fairly similar, Dubai benefits from a much higher tourism spending and a higher daytime population as workers commute in from other emirates. The additional VAT receipts should help offset some of the losses to government revenues from the reduction in service fees that the government of Dubai recently implemented as part of its efforts to stimulate the economy in the face of decelerating non-oil real GDP growth.
Naveen Sharma, head of the Accounting, Audit & Advisory Services Focus Group at the Indian Business and Professional Council Dubai, said VAT collection will increase for the current year as well due to a high compliance ratio and increased spending for Expo 2020.
“I think the UAE will collect around Dh40-Dh50 billion in VAT for this year. The economy is growing rapidly as the UAE government has taken a number of economic measures that will result in an increase in VAT collection,” Sharma said.
Pratik Shah, partner at WTS Dhruva Consultants, said VAT collection in 2018 included tax on transition contracts and arrangements apart from the supplies undertaken in 2018, and this is one of reasons that VAT collection crossed the estimate.
“While the 2019 revenue collection would not have VAT on transition contracts, a potential increase in revenue collection could be expected due to changes in the tax position/transactions on which VAT is unpaid in 2018 as majority of the companies in UAE are re-evaluating the position taken at the time of VAT implementation.”
In addition, the UAE’s GDP is expected to grow at 3.5 per cent in 2019 as compared to 2.8 per cent in 2018, and impact of the increase would have a positive impact on the revenue collection, he added.
“Overall, expected VAT collection could be in the range of Dh30 to Dh32 billion in 2019. In addition to this, there would be excise tax collection and potential penalty collection on account of delay in payment of taxes, filing voluntary disclosures, delay in registrations/filing returns, etc. One may need to see the impact on the revenue collections considering the refunds to be disbursed by the FTA in 2019,” Shah added.
Best said given this high level of compliance in the first year and Moody’s expectation for non-oil growth to remain subdued, it does not expect a significant increase in VAT collections in 2019. It will nevertheless be higher than currently budgeted.
UAE’s VAT collections exceeds expectations by a wide margin in 2018
UAE residents paid Dh27 billion in value-added tax (VAT) last year, surpassing the government’s target of collecting of Dh12 billion, an increase of 125 per cent. It even surpassed the goal of Dh20 billion VAT revenue collections for 2019.
The total VAT collection was also close to the UAE’s nine-month of surplus, which stood at Dh28 billion during the January-September 2018 period.
Analysts expect that VAT revenues will further increase in 2019 as companies analyse their incomes, expenses and IT systems to ensure that correct VAT has been paid. This, in turn, will help the government to increase its spending on the infrastructure and public welfare programmes.
“The introduction of VAT is a key fiscal reform and we had forecast stronger VAT collection of around 1.6 per cent to 1.8 per cent of GDP in the first year of implementation. We expect to see some pickup in 2019 as spending normalises after the initial impact of VAT on consumer spending wanes, though we still see softness in household expenditure. Some of the VAT in 2018 was absorbed by corporates as they reduced prices to support domestic demand,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.
“VAT collection in the UAE would have benefited from the great role of private consumption in the economy, resident and tourist related, and the broader VAT base, than, say Saudi Arabia,” Malik added.
The Dh27 billion VAT collection accounted for 1.7 per cent of the UAE’s 2018 nominal GDP, which is projected to reach Dh1,589 billion, per IMF estimates.
Surandar Jesrani, managing partner and CEO of MMJS Consulting, attributed robust revenues in the first year mainly to the efforts of the Federal Tax Authority on highlighting the importance of compliance.
“We act as a consultant to many businesses in the UAE and we see each day how businesses care about VAT compliance. I believe ‘VAT in business’ is like a ‘blood in body’; once VAT is in business, it’s there for all and due importance to it can’t be ignored. The culture of VAT is developed and developing further,” said Jesrani.
He, however, refused to forecast an expected increase in VAT revenues for 2019 but said that revenues will be on a consistent basis.
Jesrani added additional revenue generated from VAT will be utilised to provide high-quality public services including hospitals, roads, public schools, parks, waste control and police services.
“This will create a lot of trust and happiness in the country because amount collected from consumers will ultimately be utilised for the benefit of citizens and residents,” Jesrani said, adding that taxation is a globally-recognised practice of expanding and increasing government revenues and the UAE is on that path that will allow the country to diversify from existing sources of income.
According to the UAE government’s decision, 30 per cent (Dh8.1 billion for 2018) of VAT revenues will go to the federal government and 70 per cent (Dh18.9 billion for 2018) to local governments, per the approved mechanism for 2018 to 2020.
Jitendra Gianchandani, chairman and managing partner of Jitendra Consulting Group, said VAT collection in 2018 was higher than the budget due to the non-VAT paid stock in hand before January 1, 2017, as registered businessmen paid output VAT to the government without setting off the VAT on inputs.
“Apart from that, 2019 has seen a significant drop in business compared to 2018 due to various local and international reasons. Hence, expecting growth in VAT has to be seen in the coming days,” he said.
Nimish Goel, partner at WTS Dhruva Consultants, said though overall economic sentiments are not high, there is a strong possibility of VAT revenue still increasing for the government.
“This is primarily because companies are still analysing their incomes, expenses and the IT systems to ensure that correct VAT has been paid by them. As more and more companies do this internal diligence, the likelihood of unpaid tax or incorrect input of VAT recovered cannot he ruled out, thereby making the curve of tax collections in the coming year high,” said Goel.
He noted that the tax money should very effectively be pumped back in the economy that will create avenues for government spending, thereby improving the sentiments of the businesses.
Bank branches will go down, but won’t totally disappear
Institute of Chartered Accountants of India – Dubai Chapter hosts seminar on fintech, blockchain
There is a massive emergence of fintech firms that will disrupt the banking industry, but they have to partner with big enterprises to get customers, speakers said at a seminar organised by the Institute of Chartered Accountants of India (ICAI) – Dubai Chapter on Saturday.
Jayesh Patel, head of Liv. Digital Bank from Emirates NBD, said digital banks are emerging across the globe in major markets such as India, the US and the UAE.
“There is a massive emergence of new fintech and platforms that are going to disrupt our industry. There are quite a number of digital banks working in different markets. Many firms struggle to launch a digital solution, largely deciding of ‘what’ they will do. Instead, they should focus on ‘why’ they are going digital,” said Patel.
“Fintechs want all the customers but that is not going to happen because they have to partner with big corporate to get customers,” Patel said while addressing the “Fintech and Blockchain – unblocking fences” seminar.
Abe Karar, founder and chief executive officer of Alchemy Digital Solutions, said the footprint of bank branches will go down but they will not disappear at all due to the emergence of digital banks.
“Even if you go digital, you still need a physical presence in one form or the other,” he said in reply to a question at the seminar.
Mishal Almarzouqi, an engineer, entrepreneur and innovator, was the chief guest. Anand Prakash Jangid, managing partner of Anand Jangid & Associates, and Arti Sogani, practice head for digital transformation at Finesse, gave presentations on blockchain technology.
Mahmood Bangara, president of ICAI – Dubai chapter, said fintech is an evolving financial industry that applies technology to improve financial activities.
“Fintech applications will also be built on blockchain technology and it uses the Internet, smartphones and any other software dimensions. It facilitates ease in transactions and the world is emerging that the banking and financial process moves around fintech from a basic application of making transactions, issuing instructions,” he pointed out.
“Fintech grows for several processes including decision by applying the relevant AI and robotics processes. Since everyone will be doing banking or financial services, surely fintech will also become relevant to every individual,” Bangara said while giving an opening speech at the seminar.
Demand for Islamic banking to drive profitability in UAE
Dubai: Emirates Islamic, belonging to Emirates NBD Group, is gaining traction in asset growth, profitability and asset quality, thanks to strong demand for Islamic banking services, a sharply focused retail strategy, and innovative digital offerings, Wasim Saifi, Deputy CEO for Consumer Banking and Wealth Management said.
In the first quarter of 2019, the bank reported a net profit of Dh411 million, an increase of 97 per cent year-on-year and 54 per cent quarter-on-quarter, for the highest ever quarterly net profit since inception in 2004.
The bank attributes its strong performance in a relatively challenging economic environment to continuing improvement in cost of risk, healthy balance sheet, stable credit quality and better liquidity.GROWTH HUBThe UAE remains a promising avenue for the growth of Islamic banking and finance.
The financial results of past few quarters prove the bank has come a long way from the days of deleveraging and low profitability in 2016-17 to strong balance sheet growth, higher funded income, growth in fee income and lower provisions.
Demand for Islamic banking
“We see enormous potential for the growth of Islamic banking in coming years, both worldwide and in the UAE. In the UAE, demand for Islamic banking products and services continues to grow, and we are seeing more uptake among both Muslim and non-Muslim consumers,” said Saifi.
Islamic banking continues to gain traction in the UAE market, going from a single-digit market share to over 20 per cent and growing. In the last 12 months, conventional banks’ total assets saw a growth rate of 4-4.5 per cent while Islamic players have been growing at 7 per cent.
EI’s net profit in first quarter, a rise of 97% year-on-year
The UAE remains a promising avenue for the growth of Islamic banking and finance, particularly given the substantial market share held by Islamic lenders in other core markets. For instance, in Malaysia, the share of Islamic banking is about 25-26 per cent, and in Kuwait it is about 40 per cent. This figure becomes significantly higher in Saudi Arabia at upwards of 50 per cent.
In the UAE, Islamic banking penetration is expected to cross 25 per cent in coming years.
One key factor driving the growth of the sector is a growing preference for Sharia-compliant products and services. Another driver is that Islamic banks are catching up to their conventional counterparts in terms of product offerings, service quality and digital capabilities, making it easier for customers to make the switch.
“We see that Islamic banks are making significant progress in terms of transforming consumer perceptions as well as enhancing overall customer experience and proposition,” said Saifi.
Average annual growth rate in Islamic banking
Findings of the 2018 Islamic Banking Index by Emirates Islamic showed UAE consumers now see Islamic banks as more trustworthy, more community-focused, and more financially sound than their conventional counterparts.
“Our findings show that 55 per cent of UAE consumers had at least one Islamic banking product in 2018, up from 52 per cent in 2017. We also saw a 12 per cent increase in the number of non-Muslim banking customers likely to adopt an Islamic finance product in the future,” he said.
Growth drivers: CWM unit on strong growth path
Emirates Islamic’s Consumer Banking and Wealth Management (CWM) division grew in net profit by 39 per cent year-on-year in 2018, contributing 57 per cent of bank’s net profit. While the bank’s fee income for the year grew 22 per cent, impairments declined by 49 per cent.
All segments contributed to the growth in CWM, in particular Business Banking, where revenues grew 12 per cent contributing to 25 per cent of total operating income, with fee income up by 48 per cent mainly due to FX and trade finance activity.
“Despite some of the challenges that are seen in different segments of the market, we still remain quite bullish on growth,” Saifi said.
Revenue growth will come mostly from fee income, given the current market environment while the bank’s focus on efficient operations are expected to improve cost-to-income and asset quality.
While the UAE’s GDP growth is projected in the range of 2-2.5 per cent in 2019, Emirates Islamic expects to maintain faster growth driven by demand from non-oil sectors, construction and infrastructure projects linked to Expo 2020 and higher government spending in Dubai.