Stop freaking out about upcoming taxes in the UAE. Coming soon in January! It's not that much.

Come January 2018, everyone in the UAE is expected to start paying a value added tax, or VAT, on various goods and services. Businesses, of course, will have to do a lot of legwork in the run up to D-day to align their systems and practices with the new law, but what will really happen to household budgets? To people like you and me? Would we have to shell out a lot more than we usually do on everything?

In short, yes, the tax will increase the monthly spend but we won't have to pay extra on everything. While the final contours of the policy are still being finalised, what we do know is that the GCC agreement gives flexibility to individual countries in defining the tax base. So there could be exemptions on staple foods and sectors such as agriculture, education, health and social services, financial services, real estate, transportation, and oil and gas.

The UAE Ministry of Finance has said that essential goods and services such as food products (a selected list), education sector, and healthcare would be exempt from VAT in the emirates.

Let's first get to the basics to understand what this tax is all about. The GCC is not the first to propose it, and the UAE won't be the first to implement it. In fact, value added tax is a norm in more than 140 countries. It is a consumption tax that is levied on products at every point of sale where value has been added. Basically, starting from raw materials and going all the way to final retail purchase by a consumer. Ultimately, the consumer pays VAT, whereas buyers earlier in the chain of production receive reimbursements for previous VAT taxes paid.

A VAT is also supported as a better alternative to so-called hidden taxes. To ease some burden from lower-income workers, governments usually offer numerous exemptions such as the ones proposed by the UAE Ministry of Finance as mentioned above.

Where would we pay this extra then? Prime examples of paying VAT could be when eating out, buying bags, perfumes, cosmetics, electronics, luxury products, home decor, phones, et al. For instance, if a hand bag costs about Dh400 now, after VAT you might have to pay Dh420. Not too bad, right?

What would be the overall impact on a monthly basis for household budgets? "This depends on a number of factors, including the propensity to consume out of overall income and scope of VAT. According to the consumer price index, 34 per cent of a representative household's income is spent on rent/utilities in the UAE; 14 per cent on food; 1.4 per cent on healthcare; and 7.7 per cent on education. These are categories which could have exemptions regarding VAT. Although details have yet to be announced regarding the transactions that will be subject to VAT, only purchases of items such as staple foods, medicines, education may not be subject to it. Taking into account these considerations, a guesstimate is that the VAT could shave off 3 per cent of household income," says Giyas Gokkent, Senior Economist, Middle East & Africa, Institute of International Finance.

By why is the UAE - and Gulf countries on the whole - implementing it now, you may think. Well, that's because VAT is an easy and efficient way of collecting tax revenue, and tends to be easier to administer than income taxation. Moreover, it will help governments in the GCC diversify their economies and reduce dependence on oil revenues.

In the UAE, VAT revenue estimates are about 2 per cent of GDP, says Gokkent. The authorities, however, are expecting Dh12 billion, which is about 0.8 per cent of GDP in 2018 and Dh20 billion (1.3 per cent of GDP) in 2019, to be shared between the Federal Government and individual emirates.

So, is this tax a deal breaker in any sense? Not really, but the cost of living certainly is going to go up as consumption expenditures rise. Back of the envelope calculations suggest, your monthly budget would go up by around 3 per cent.

In short, when the next appraisal cycle comes, and here I am talking about salaried people like me, instead of asking for 5 per cent raise, ask for at least 10 to offset the setback made by this value added tax. That would be a sweet deal, wouldn't it?

- suneeti@khaleejtimes.com

Suneeti writes for a living. She plans to save enough to build a house by the sea and retire