E-commerce to contribute significantly to VAT revenue

Dubai: E-commerce is expected to significantly bolster government revenues from value added tax (VAT) in the UAE, data on fast growing online sales indicate.

The UAE introduced VAT in 2018 as part of its fiscal strategy to diversify the government revenues. VAT, essentially a consumption tax is universally applicable for all purchased including online purchases with very few exceptions.

In the case of online purchases, according to the Federal Tax Authority (FTA) all purchases are subject to the same 5 per cent VAT as any other purchase made through traditional outlets if the products purchased online are received within the UAE.

The VAT revenue from online sales are becoming increasingly significant in the overall tax revenue in the context of the significant growth in UAE’s e-commerce.

According to a recent study by Visa International and Dubai Economy, the UAE’s ecommerce sales are projected at $16 billion (Dh59.billion) in 2019. At 5 per cent VAT rate, online sales is estimated to have contributed nearly Dh3 billion to government revenue last year.

UAE’s tax revenue, including value-added tax (VAT) made up 5.5 per cent of the total public revenue in 2018, according to the Ministry of Finance (MoF).

The UAE’s total overall revenues reached Dhs456 billion in 2018, of which tax revenues made up Dh25 billion.

The UAE’s decision to introduce VAT benefited the country, as it recorded a budget surplus of 2.2 per cent in 2018, compared to deficits of 0.2 per cent, 1.3 per cent and 6.4 per cent in 2017, 2016 and 2015, respectively.

Currently, the UAE is considered the most advanced ecommerce market in the Middle East and North Africa (MENA), with a penetration rate of 4.2 per cent; the Kingdom of Saudi Arabia (KSA) follows at 3.8 per cent.

Bright outlook

According to the Visa study, e-commerce sales in the UAE are estimated to grow by an average of 23 per cent annually between 2018 and 2023. The UAE enjoys many advantages that make it ideal for ecommerce growth. Its consumer demographic consists of a young internet-savvy population, with high social media usage. These people are more likely than some of their cohort globally to spend time online.

The UAE retail industry – classified into store and non-store sales, which include e-commerce – is estimated at $55 billion in 2018 and is forecast to rise to $63.8 billion by 2023.

The ecommerce segment is classified under non-store retailing, which encompasses online shopping, direct selling, mobile internet, social media and home shopping. The non-store category is forecast to grow by 78 per cent from 2018 to 2023.

A recent consumer survey revealed that 81 per cent of adults in UAE shopped online in 2017, up from 68 per cent in 2016. According to the report, the increase in online spending is also forecast to continue, with almost half of online adults surveyed (49 per cent) stating they will increase their online spending in the next 12 months, citing convenience of shopping online (selected by 65 per cent of those who predict an increase in their online spend), and the rise in available platforms to shop from (40 per cent) as the key reasons for the expected increase.