The new five percent VAT charge will launch on 1st January 2018 and be applicable to many products and services purchased in the UAE. Education professionals believe that while school fees remain VAT exempt, schools will be hit by a more general rise in inflationary pressures.
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Note: According to a strict reading of official documents so far released, it is only clear that government owned schools will be exempt from VAT. It is not clear that privately owned schools will be.
According to Article 45, the "Supply of Goods and Services that is Subject to Zero Rate", sub-section 13 of the VAT Decree Law:
"The supply of educational services and related Goods and Services for nurseries, preschool, elementary education, and higher educational institutions owned or funded by Federal or local Government, as specified in the Executive Regulation of this Decree-Law.
Knock on effect
Even should private schools be exempt, WhichSchoolAdvisor.com spoke to several school operators who believe there is likely to be a knock-on effect to school fees, although many also admitted that the exact amount would not be known until full details of what will be exempt is made clear.
"Even if school fees are zero rated there will be a knock on effect. We may be able to claim back VAT on items we directly buy, there are a lot of costs further down the chain that are only indirectly related to our cost base. If our teachers need to pay 5% more for rent, then clearly over time that will impact the salaries we pay."
"Right now, we're awaiting clarification on just what the VAT will apply to and what it won't."
So while schools will be able to claim tax refunds for any supplies or services purchased, the the base cost of goods could increase as a result of the more general inflationary effect of VAT.
"We estimate that VAT could add about 2.7 to 3.7 percentage points to headline inflation in the first year post introduction. However, the introduction of the tax in other countries shows that it can take a few months for the potential rise in prices to fully filter into the inflation data,” said Monica Malik, Chief Economist of Abu Dhabi Commercial Bank (ADCB), in a recent note.
Given the amount schools can put up fees in the UAE is directly related to price rises, there clearly will be an indirect link between VAT and school fees, even if ultimately muted by protections the government puts in place for the edcuation sector.
Each year Dubai Statistics Centre reports the Educational Cost Index, a measure of how much general inflationary pressures have affected school costs. Schools rated as “outstanding”are eligible to increase fees by double the Educational Cost Index, “very good” schools by 1.75 times the ECI and “good” by 1.5 times.