Impact of VAT on Automobile Industry in UAE

The automobile industry in UAE is facing a tough time due to excess stock and is gearing up with new VAT era carefully. Stakeholders consider that the final legislative framework of VAT agreement could provide some clarifications for the operational purposes, for imported and local vehicles.

Currently, several car manufacturers and dealers are making the automobile industry highly competitive specifically for the SUV, mid- size and SUV segment. Car manufacturers and dealers are trying to lure customers just by providing a discount on the new purchase, loan facility, low maintenance cost and free insurance for the first year. Dealers are doing this just because to clear out the available stock before the introduction of VAT in UAE.

It is estimated that a number of people using cars in UAE are expected to grow at a rate of 5 per cent CAGR approximately 10.3 million in 2015 to 13.2 million in 2020.

After the implementation of VAT from 1st January 2018, it will impact the car industry in both short term and long term. In the long term, the prices of cars will increase and VAT will be applied on sales of new cars. In the short term, this may lead to a rise in demand for cars before the introduction of VAT as the buyer is trying to beat the price rise. This could provide an encouragement to the car manufacturers towards the end of 2017 and they might offer some attractive offers to their potential buyers.

Automobile industry players are fearing about the introduction of VAT and believe that it will impact the sales of cars just because the price of cars will go up after the implementation of VAT in UAE. Currently, automobile sector is focusing on tactical offers and not expecting to stop in the future. Yet VAT framework agreement is not disclosed by the government and we are eagerly waiting for the VAT framework agreement, wondering how much tax will be levied on cars. We expected that buyers or customers pre-planning their vehicle purchasing decision to make use of the five percent savings.

The implementation of VAT is a common phenomenon for the development of the economy and currently, VAT is implementing in several others countries. So VAT is a new concept only for UAE members not for other countries. We do not anticipate any noticeable change in demand once VAT is embedded into the pricing mechanism of the vehicles.

Car manufacturers experience a significant rise in sales of cars. As users replace their existing cars with newer models before and after the year- end. Users will purchase the newer model of cars before the implementation of VAT to avoid 5 percent tax. Car manufacturers or dealers are trying to sell as many cars before December 2017 at pre- VAT prices. Although, car dealerships are trying to evaluate sales campaign to clear the available stock of 2017 models and pre-owned cars in anticipation of the introduction of VAT.

At present, the demand for cars in UAE is low and the supply or available stock of cars is high. It is affecting the automobile industry and making the sector think about clearing their available stock before December 2017.

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