Impact of VAT on Small Businesses in the UAE Case Study

Introduction - Analyzing Consumer Demographics and Economic Effects

The VAT was introduced over a vast majority of the goods and services traded in the country by the UAE authorities in 2018. As a result of the change in the taxation policy of the government, it had increased the price of almost all of the goods sold, purchased and traded in the country. Smaller businesses got hurt particularly since they had less financial protection against such headwinds. In this report, a statistical analysis of the impact of educational level, gender, age and demographics of customers was completed, based on survey data collected by the researchers. This might impact the VAT policy of the Emirati government as well.

Overview

The VAT imposed by the UAE government and central bank in 2018 had a series of impacts on them. The “Value-Added Tax (VAT)” was imposed by the government of the United Arab Emirates in 2018. A 5% VAT was added on selling, purchasing, importing and exporting of almost all the products and services in and out of the country (Murphy, 2019). There was both positive and negative impact of the VAT on the business interest of the smaller companies and the revenue collection of the UAE government as well.

Explanation of the Impact of Value-Added Tax on Cash Flow in the UAE Small Businesses

The value-added tax (VAT) is the sum charged by any government on any goods sold in their country. The VAT is different from the import or export tax, or corporate tax taken by the governments. Till recently, the market of the United Arab Emirates (UAE) was mostly tax-free for all companies, foreign or domestic doing business in cities like Dubai and Abu Dhabi.. The minimum rate of VAT is 5% (Gopakumar, 2022). As a result of the VAT, several positive and negative impacts on the businesses of small companies, as well as on the revenue collection of the government happened.

Impact on companies

As a result of the 5% VAT charge, there is a negative impact on the cash flow of the small businesses in the country. Generally, small companies mainly operate domestically, with little international exposure. The customers of these outlets would have to pay the relevant VAT tax for their purchase of products and services. And, the foreign goods they sell in their outlets to the customers include third-party purchases from international traders (Verma,2019). But then, there was also a VAT that had to be paid by the company for their purchasing of foreign goods from third-party traders.

Impact on the local trade

In the case of the smaller trading companies, the imposition of the tax hurt them as a result of the increasing price of the imported goods due to tax. Also, the small manufacturing companies would have to pay relevant taxes on importing raw materials to manufacture products. At the end of the chain, the customers were also forced to pay taxes to buy the products. As a result of the increasing cost of the goods and services to the local customers, the overall supply chain associated with the business got somewhat disrupted in comparison to previous years (Alkhodre,2019). Thus, in an overall context, it led to a situation where the businesses might face some financial losses.

Impact on the Purchasing power of consumers

Also, as the major corporations were forced to cut down their operations in the country, there was a negative impact on the employment opportunities in the country. As some of the smaller businesses closed down their shops. And, moved to other Gulf countries like Qatar, Bahrain, and Saudi Arabia where the rate of VAT is lower or no VAT is present (Tikasari,2020). This further negatively impacted the demand for goods in the domestic market as a result of the negative impact on purchasing power. As the demand for goods and services was negatively impacted by the imposition of taxes, it resulted in a decrease in the transactions by numbers as well as by volumes.

Data Analysis

4.1 Demographic Analysis

Gender

Figure 1: Table and Chart of Demographics of Gender

Through Chart 1, the Gender Demographics could be observed in 2 different segments, which are comprised of 2430 participants. In the Gender variance, 1,631 participants are observed and in the Gender variance 2, 584 participants are observed (Tariqali,2022). There are around 1215 participants who have not agreed to disclose their gender demographics in this survey.

Age

Figure 2: Table and Chart of Demographics of Age

Through Chart 2, the Age Demographics could be marked in 4 distinct segments, which are comprised of 2430 participants. In the Age variance,1, 338 participants are observed and in the Age variance 2, 293 participants are observed (Bansal,2020). Under Age variance 3, 439 participants are observed. Under Age variance 4, 145 participants are observed. There are around 1215 participants present who have not decided to disclose their age demographics in this survey.

Educational Level

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Figure 3: Table and Chart of Demographics of Education Level

Through Chart 3, the Demographics of Education Level could be segmented into 3 distinct segments, which are comprised of 2430 participants. In the Education Level variance, 1, 682 participants are observed and in the Education Level variance 2, 340 participants are observed. Under Education Level 3, 193 participants are observed (Cassim, 2020). There are around 1215 participants present who have not decided to disclose their demographics of Education Level in this survey.

Job Level

Figure 4: Table and Chart of Demographics of Job Level

Through Chart 4, the Demographics of Job Level could be segmented into 3 distinct segments, which are comprised of 2430 participants. In the Job Level variance, 1, 339 participants are observed and in the Job Level variance 2, 488 participants are observed. Under Job Level 3, 388 participants are observed (Atko?i?nien?,2022). There are around 1215 participants attending who have not decided to reveal their demographical description of their Job Level in this survey.

Years of Experience

Figure 5: Table and Chart of Demographics of Years of Experience

In the Chart 5, the Demographics of Years of Experience could be segmented into 4 distinguishable segments, which are constituted of 2430 participants. In the Years of Experience variance, 1, 340 participants are observed and in the Years of Experience variance 2, 291 participants are marked. Under Years of Experience Variable 3, 390 participants are observed. Under Years of Experience Variable 4, 194 participants are observed (Cherian, 2020). There are around 1215 participants are current who have not determined to demonstrate their demographical description of their Years of Experience in this survey.

4.2 Descriptive Analysis

VAT

Figure 6: Table of Descriptive Statistics of VAT

In the interpretation of the description of VAT, the VAT variances could be observed at 1-10, the mean-variance would be observed in the range between 3.60 to 4.08, the minimum range is observed at 1 and the maximum variance is observed at 5 (Balharith,2022). The standard deviation is observed to be ranged from .734 to 1.133. In the analysis of the Skewness and Kurtosis are observed to be doubled in valuation. As an independent variable, it is quite beneficial in the Economic taxation structure of the Economy of U.A.E

Interpretation of Comparison

Figure 7: Table of Descriptive Statistics of RV, OM, CE

In the comparison of the independent variable of the VAT with the other taxable variances like CE, OM, RV is observed to be less effective than the variance of the VAT in the perspective of the mean variances. In some cases, the standard deviation and the mean variances could be observed to the quite similar in valuation. Through the effective comparison of the descriptive variables of the rest of the three taxing elements. In some cases of CE, CE 8 and CE 9 are compared to be slightly higher than the VAT variances. As a dependent variable, it is performing quite significantly as it is signifying an increase in the competitive collection of Taxes in the U.A.E

4.3 Cronbach Alpha

VAT

Figure 8: Table of Cronbach’s Alpha of VAT

The above figure shows the table of Cronbach’s Alpha of VAT. The total number of cases of this calculation is 2430 which contains all over 100% of cases but the valid cases of this Cronbach’s Alpha of VAT become 1215 which contains 50% and the remaining excluded cases of this Cronbach’s Alpha of VAT become also 1215 which also contains 50%. Also, through the reliability statistics of Cronbach’s Alpha of VAT, here identifies that Cronbach’s Alpha contains 0.862 types of model and also borrows 10 types of items.

Interpretation

Figure 9: Table of Cronbach’s Alpha of RV, OM, CE

The above figure shows the table of Cronbach’s Alpha of RV, OM, and CE. The total number of cases of this calculation is 2430 which contains all over 100% of cases but the valid cases become the same as Cronbach’s Alpha of VAT i.e. 1215 which contains 50% and the excluded cases Cronbach’s Alpha of RV, OM, CE (remaining of this Cronbach’s Alpha of RV, OM, CE become also 1215 which also contains 50%. Also, through the reliability statistics of Cronbach’s Alpha of VAT, here identifies that Cronbach’s Alpha contains 0.957 types of model and also borrows 30 types of items which is different from VAT(Demirgunes,2023). That means Cronbach’s Alpha of RV, OM, and CE contains a huge level of quantity and produces a similar number of cases.

4.4 Split Half Reliability

VAT

Figure 10: Table of Split half Reliability of VAT

Through the above figure here understand that the table of split-half reliability of VAT contains a total 2430 number of cases. Also, through the reliability statistics level here understand that Cronbach’s Alpha part 1 and part 2 contains 0.667 and 0.881 value of items. But at this moment here also find that spearman-brown and coefficient value contains equal and unequal length. The negative impact on the cash flow of the smaller businesses was linked to the reduction of purchases by the customers.

Interpretation

Figure 11: Table of Cronbach’s Alpha of RV, OM, and CE

Through the above figure here understand that the table of Cronbach’s Alpha of RV, OM, and CE contains a total 2430 number of cases. Also, through the reliability statistics level here understand that Cronbach’s Alpha part 1 and part 2 contain 0.902 and 0.928 value of items. But at this moment here also find that spearman-brown and coefficient value contains equal and unequal length

4.5 Bootstrapping

VAT

Figure 12: Table of Bootstrapping of VAT

The above chart of correlation is being constructed on the Bias process with the coefficient variance of 95%, which has bootstrapped in the perspective of the 1215 participants in the variances, which also signifies the growth of the VAT variance in the Bootstrapped process of correlation.

Interpretation

Figure 13: Table of Bootstrapping of RV, OM, CE

The above figure shows the Bootstrapping of RV, OM, and CE. This table uses the simple sampling method and uses 1000 samples to bootstrap the method by using the “Bias-corrected and accelerated” type.

4.6 Q-Q Plots

VAT

Figure 14: Table of Q-Q Plots of VAT

In the interpretation of the Q-Q plots of VAT variances, the X variances of the Detrended normal observed value, and the Y value are observed to normal valuation (Mans, 2019). In the interpretation of the charts, the growing undervaluation of the TAX payments could be observed. As it could be a significant risk factor for the U.A.E economy.

Interpretation

Figure 15: Table of Q-Q Plots of RV, OM, CE

In the comparison with the independent variable with VAT, the dependable variable would be observed in the perspective of RV1 and 2, CE1 and 2, and OM1 and 2. The average mean variance of the fraction is observed at 3.80 (Sadiq,2021). This is a standard estimation that would be according to the length of the sequences. This comparison is quite on the edge of the comparison with VAT.

4.7 Pearson Correlation

VAT

Figure 16: Table of Pearson Correlation of VAT

Through the detailed analysis of the Pearson correlation in the variable of VAT, the two-tailed analysis would show the increasing relation trends between the variables. As there are X variances and Y variances (Bala,2019). Through the interpretation of the growth trend of the dependable variables, the correlative relation could be signified in the tax structure of the U.A.E

Interpretation

Figure 17: Table of Pearson Correlation of RV, OM, CE

In this section, the correlative comparison of the Pearson Correlation of the elements of RV, OM, and CE, would be observed to be effectively contributing to the definitive growth in the U.A.E’s economic development in comparison to the VAT variances.

4.8 Anova

VAT

Figure 18: Table of Anova of VAT

The above figure shows the ANOVA test of VAT. Here use the 10 components of VAT. Through the figure here understand that the sum of squares gains a higher valuation i.e. 1558.193 in the component of VAT 8. Also, the “F” value contains the higher value i.e. 1096.693 in the component of VAT 2.

Interpretation

Figure 19: Table of Anova of RV, OM, CE

The above figure shows the ANOVA test of RV, OM, and CE. here use the 10 components of RV. Through the figure here understand that the sum of squares gains a higher valuation i.e. 1100.166 in the component of RV 10. Also, the “F” value contains the higher value i.e. 220.634 in the component of RV 9.

4.9 Kaiser-MeyerOkin(KMOtest)

VAT

Figure 20: Table of KMO Test of VAT

Through the interpretation of the KMO test of VAT, the highest variance is observed at .661 in the compound matrix. The KMO adequacy is observed at .653. The cumulative variance is also observed to be increasing in nature. The extraction method is observed in the principal component analysis.

Interpretation

Figure 21: Table of KMO Test of RV, OM, CE

Through the performance of the KMO test of VAT, the highest variance is observed at .648 in the compound matrix. The KMO adequacy is observed at .753 as it is more efficient than the VAT variance (Support.stripe.com, 2020). The cumulative variance is also observed to be increasing in nature. The extraction method is observed in the principal component analysis.

Conclusion

In conclusion, it could be said that the adaptation of the VAT tax policy on consumer goods and services had a positive impact on the revenue and overall economy of the UAE. From the results of the descriptive analysis, it could be said that the VAT had a positive impact on customer choices, regardless of age, gender, or educational qualifications. Since, Cronbach’s Alpha of RV, OM, and CE contains a huge level of quantity and produces a similar number of cases, it signifies a positive impact of VAT in comparison to RV, OM, and CE. After the KMO test, the results indicated that the samples analyzed were adequate.

References

Book

Murphy, (2019) The impact of a value-added tax on the cash flow of corporations available at https://search.proquest.com/openview/b38e24807f020f96b9bab9808bbd1c0c/1?pq-origsite=gscholar&cbl=18750&diss=y [Accessed on 9.9.2023]

Journals

Elmadhoun, I. R., & Reddy, G. N. (2022). The Effect of Real Earnings Management on Economic Value Added: Listed Companies of Dubai Financial Market. International Journal for Research in Applied Science & Engineering Technology (IJRASET), 10(1), 1577-1587. Retrieve From https://www.researchgate.net/profile/Ibrahim-Elmadhoun/publication/358258942_The_Effect_of_Real_Earnings_Management_on_Economic_Value_Added_Listed_Companies_of_Dubai_Financial_Market/links/61f88e8a1e98d168d7e257ee/The-Effect-of-Real-Earnings-Management-on-Economic-Value-Added-Listed-Companies-of-Dubai-Financial-Market.pdf [Retrieved on: 9.9.2023]

Gopakumar, A. A., Kaur, A., Ramiah, V., & Reddy, K. (2022). The Sectoral Effects of Value-Added Tax: Evidence from UAE Stock Markets. Journal of Risk and Financial Management, 15(10), 429. Retrieve From https://www.mdpi.com/1911-8074/15/10/429/pdf [Retrieved on: 9.9.2023]

Verma, P., Agarwal, S., & Gupta, D. (2019). Uae Hogging in the Limelight of Vat-1st January 2018. Global Journal of Enterprise Information System, 11(1), 131-139. Retrieve From http://gjeis.com/index.php/GJEIS/article/download/50/52 [Retrieved on: 9.9.2023]

Alkhodre, A., Jan, S., Khusro, S., Ali, T., Alsaawy, Y., & Yasar, M. (2019). A blockchain-based value added tax (VAT) system: Saudi Arabia as a use-case. Int. J. Adv. Comput. Sci. Appl, 10(9), 708-716. Retrieve From https://www.academia.edu/download/63617627/Paper_88-A_Blockchain_based_Value_Added_Tax20200613-39850-yakteb.pdf [Retrieved on: 9.9.2023]

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Bansal, A., & Alfardan, A. A. (2020). Role of value added tax in the economic development of Kingdom of Bahrain. Journal of Critical Reviews, 7(3), 17-24. . Retrieve From https://www.jcreview.com/admin/Uploads/Files/61a861637ce4b4.12227541.pdf [Retrieved on: 9.9.2023]

Cassim, Z., Handjiski, B., Schubert, J., & Zouaoui, Y. (2020). The $10 trillion rescue: How governments can deliver impact. McKinsey & Company. Retrieve From https://www.interest.co.nz/sites/default/files/embedded_images/The-10-trillion-dollar-rescue-How-governments-can-deliver-impact-vF.pdf [Retrieved on: 9.9.2023]

Atko?i?nien?, Z. O., Gribovskis, J., & Raudeli?nien?, J. (2022). Influence of Knowledge Management on Business Processes: Value-Added and Sustainability Perspectives. Sustainability, 15(1), 68. Retrieve From https://www.mdpi.com/2071-1050/15/1/68/pdf [Retrieved on: 9.9.2023]

Cherian, A. (2020). The construction industry in the perspective of an economic boost of the United Arab Emirates (UAE). Int. Res. J. Eng. Technol, 9001, 270-276. Retrieve From https://www.academia.edu/download/64714948/IRJET_V7I846.pdf [Retrieved on: 9.9.2023]

Balharith, M. M. (2022). The Effect of Value-added Tax on the Retail and Wholesale Sector and Consumer Behavior in Kingdom of Saudi Arabia (Exploratory Case Study). Ijrsp, 3(36), 492-520. Retrieve From https://www.ijrsp.com/pdf/issue-36/18.pdf [Retrieved on: 9.9.2023]

Demirgunes, K. (2023). INVESTIGATING THE RELATIONSHIP BETWEEN MARKET VALUE-ADDED (MVA) AND ECONOMIC VALUE-ADDED MOMENTUM (EVAM): EMPIRICAL EVIDENCE FROM TURKIYE. Journal of Economics Finance and Accounting, 10(2), 85-97. Retrieve From https://dergipark.org.tr/en/download/article-file/3332625 [Retrieved on: 9.9.2023]

Mans, E. (2019). An analysis of the value added tax implications on crypto currency transactions (Doctoral dissertation, North-West University). Retrieve From https://repository.nwu.ac.za/bitstream/handle/10394/33018/Mans%20E.pdf?sequence=1 [Retrieved on: 9.9.2023]

Sadiq, M. (2021). IMPACT OF MAKING TAX DIGTAL ON SMALL BUSINESSES. Kuwait Chapter of the Arabian Journal of Business and Management Review, 10(3), 123-134. Retrieve From https://www.arabianjbmr.com/pdfs/Arabian%20Journal%20of%20Business%20and%20Management%20Review%20(Kuwait%20Chapter)_KD_VOL_10_3_2021/3_ajbmrkd_10032021.pdf [Retrieved on: 9.9.2023]

Article

Bala,2019 A Study of VAT in United Arab Emirates & Its Impact on Financial Services & Insurance Industry available at https://ieeexplore.ieee.org/abstract/document/9004399/ https://search.proquest.com/openview/b38e24807f020f96b9bab9808bbd1c0c/1?pq-origsite=gscholar&cbl=18750&diss=y [Accessed on 9.9.2023]

Website

Support.stripe.com, 2020 Taxes on Stripe fees for UAE businesses available at https://support.stripe.com/questions/taxes-on-stripe-fees-for-uae-businesses [Accessed on 9.9.2023]