UAE has a long-standing association with the gold jewelry industry. It is famously known as the City of Gold. In fact, for a lot of people from the Indian sub-continent, the words, “Dubai” and “Gold” are synonymous to each other. When VAT was introduced in 2018, there were questions on whether this sector would lose its sheen since no tax on sales in UAE was one of the major attractions for retail buyers. Now four and half years after the VAT implementation, let us assess its impact on the gold jewelry industry.
To understand the above, we must break down the gold jewelry industry in UAE on the basis of selling points, which are as follows:
1. Retail sales to local residents and tourists in UAE
2. Wholesale sales to local retailers & wholesalers in UAE (B2B)
3. Wholesale sales to overseas retailers & wholesalers, i.e. export sales (B2B)
Let us understand the impact of VAT on each of the above segments:
The main factors which attract individual buyers to the UAE gold market are purity assurance due to periodic checks by Dubai Municipality, availability of huge variety of jewelry from all over the world and low pricing compared to their home countries. With the introduction of VAT of 5%, jewelry did become more expensive, however the impact of the same was limited as the tax rate was still lower than the tax rate in most other countries. For example, current effective tax rates (customs duty + GST) on Gold jewelry in India amount to approximately 19%. As a result, there was only a marginal dip in sales in 2018 after the implementation of VAT, however sales bounced back to normal levels shortly thereafter. Furthermore, in the case of tourists, once the government started issuing tourist VAT refunds, they did not have any impact of VAT.
Wholesale sales or B2B sales within UAE form the backbone of the gold jewelry industry. The impact of VAT was huge for this segment, as 5% tax on large transaction amounts meant that significant amounts of working capital was getting blocked for wholesalers. With efforts from the Dubai Gold and Jewelry Group, in May 2018, the UAE government took a pragmatic step and asked VAT Registered Buyers of products containing gold and diamond to account for VAT by the reverse charge mechanism. This meant that while selling gold jewelry, sellers did not have to charge VAT if the recipient was registered for VAT in UAE & if he certified that he intends to either resell such goods or use them to produce or manufacture any goods. This eliminated the impact of VAT for the wholesale segment by freeing up cash flow and sales were back to normal after June 1, 2018.
Export sales were taxed at 0% since the beginning and as such there was no impact of VAT implementation on these sales.
On an overall basis, VAT implementation caused the retailers and wholesalers to invest in systems, which helped formalized the trade. It gave international legitimacy to the gold jewelry trade in UAE. It will also enable a smooth transition to the upcoming Corporate tax implementation 2023 onwards. The rate of 5% is still lower than the taxes imposed in most other major countries and therefore UAE continues to hold a strategic advantage.
Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.
You can access Law including Guidelines, Cabinet & FTA Decisions, Public Clarifications, Forms, Business Bulletins for all taxes (Vat, Excise, Customs, Corporate Tax, Transfer Pricing) for all GCC Countries in the Law Section of GCC FinTax
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