Impact of taxation on the country economy
Write about taxes and cover the following points:
1- Introduction. (250 to 300 Words).
2- Definition of tax and its types. (300 to 350 Words).
3-Impact of taxation on the country economy. (300 to 350 Words).
4- Tax in UAE context. (300 to 350 Words).
5- Write conclusion and recommendation about your perception about the tax. (200 to 300
Words).
Points to be considered:
● The report should have a decent amount of information
● APA style referencing
● Proper references (Published researches, Books, and Professional reports).
● Writing Mechanics, Grammar and Spelling
● Content and Organization
● Development
● Conclusions and Recommendations
● Ethical standards and Timeliness
Solution
Introduction
Taxation is the process by which a country, government authority, to be precise, imposes
or levies a tax to commercial businesses, working citizens of the country, imports and exports,
and any money generating activity in the country. The resultant revenue collected from taxation
is considered as taxes and are used by the government to finance government projects that are in
line with the development of the country. Taxation is imposed on money exchange in the form of
payment in business markets and it requires no consent of the taxed amounts and is not imposed
directly on the services offered. The government authority responsible for taxation induces
taxation through a forced process and threat is incorporated, in that, it is mandatory for all
businesses for a country to pay taxes through a specific taxation rate. Taxation is legally
authorized as it is a public sector organization practice and both public and private sectors are
taxed (Kagan, 2020).
Various jurisdictions have different forms of taxes and they also have different taxation
rates according to the economic growth of the country. Formulation of the taxation process is
under the jurisdiction of the government authority and the policies are also implemented by the
same authority. The most basic function of taxation is to finance government projects that are in
line with the development of the country. However, in some countries, taxes are used to finance
the ruling parties, finance military operations by building defenses to protect the country. A
useful classification of taxes has been considered as economically supportive factors. Imposing
taxes have encouraged a more reasonable society as more taxes have been imposed on specific
products which are a threat to the health of the society or have more consumption than other
IMPACT OF TAXATION IN THE ECONOMY OF THE UAE 3
products. For example, products like gasoline and tobacco usually have more taxes than other
products.
Definition of Tax and its Types
As cited by Kagan (2003), tax is a compulsory levy imposed on taxpayers by a
government authority to finance other government projects and expenditures. Tax evasion is
punishable by law and can result in the collateral damage of assets. Taxes are classified as direct
taxes or indirect taxes where direct taxes are paid by cash and indirect taxes are automatically
deducted by the tax system. In a country, taxes are imposed on the income generated by an
individual or a company. Taxes are classified in different types, that is, income tax, corporate
tax, capital gains, property, inheritance, and sales taxes. Economically, the transfer of taxes from
income to the government has different impacts on the economy depending on how it is imposed
and used. Taxes are applied to different levies.
Income taxes are levied from the financial income of individuals and businesses. This
form of tax is applied to earned wages, commission, and salaries; also, the unearned income,
rents, interests, and dividends are also taxed in this category. Corporate tax is imposed on
organizations and companies, especially those with high-profit income and they have different
ranges of taxation rates. These taxes are based on the earnings from the company’s earnings after
deducting the expenses used to generate the profits. Capital gains tax is imposed on the sales
made to different entities of a company like shares, bonds, real estates or stocks. They are paid
by the seller of the product and is charged on the final price of the assets involved. Property
taxing in the tax that is levied on assets, that is property owned by an individual and is measured
by the size of land or amount of property owned by the individual. Property taxes are ranked as
IMPACT OF TAXATION IN THE ECONOMY OF THE UAE 4
taxes that generate more revenue to the government since many individuals in a country own
several properties. Taxes on inheritances are imposed when someone legally inherits property or
assets of a deceased person. All inherited assets are taxable unless they are generated from a tax-
free source. Sales tax is taxed in the form of value-added tax (VAT), and excise tax, a state or
provision tax or a good and service tax (GST). Sales tax is used by the government to budget
different expenditures in the country like schools, roads, and other public assets.
Impact of taxation on the country's economy
According to Pettinger (2020), taxation in a country influences the economic behavior of
the country thus redesigning the economic infrastructure of the country. For example, high taxes
on some products change the operation strategies of the company and may end up employing
more people thus raising their living standards. High tax income increases the distribution of
income within the country and reduces the incentives to work and supply labor. Taxation raises
the government revenue which allows the government to uses more finance in improving the
education status and the medical facilities in the country. However, the developments done by
the government depends on the amount of revenue generated and the intended purpose of the
revenue. More revenue for the government through taxation reduces the amount taxed to the
individuals and other companies which are subject to taxation. The aggregate demand is not
affected by the use of taxed revenue by the government. A positive improvement of the economy
triggers an incentive effect where people can decide not to work overtime because the economy
has been stabilized by the cash flow circulating in the society and business environments and
other legal markets. A substitution effect where there are lower wages caused by high taxes will
encourage workers to work less and the income effect has higher taxes and results to workers
IMPACT OF TAXATION IN THE ECONOMY OF THE UAE 5
working for longer hours. The Laffer economic curve suggests that high taxes will lead to lower
taxes in the long run and reduces the workloads.
Tax in UAE Context
Based on an article by Santander Trade (2020), the UAE uses a taxation system that is
almost similar to the systems used by other countries across the world; however, it has a different
variation. The UAE government introduced the VAT tax in January 2018 with a rate of 5%
(UAE Government, 2019). This was aimed at boosting the economy revenue in the country and
is imposed on several retail products with a 5% rate if the products are purchased within UAE
borders. An excise tax is imposed on all products that are health hazards in the UAE, including
tobacco, alcohol and fast foods have the most rates while being taxed. Carbonated drinks,
tobacco products, and energy drinks all have 50%, 100%, and 100% excise taxes respectively.
Start a business in the UAE; you have to register the business for excise tax through the e-service
online service on the Federal Tas Authority website. Expatriates in the UAE are not taxed thus
they enjoy a tax-free lifestyle; however, their taxes are taxed from their country of origin
because, when registering to work in the UAE, you are also required to fill your country of origin
for taxation purposes. All laws attached to the taxation process from your country of origin will
be implied. Businesses in the UAE which have their operations in the free zones are exempted
from taxation for a given amount; however, other businesses that run out of the free zones are
subjected to full taxation policies. Tourism in some Emirati states is also taxed, for example,
hotels in Dubai, Abu Dhabi, and Ras-al-Khaimah charge a 6% tax on tourism activities.
Conclusion and Recommendation
IMPACT OF TAXATION IN THE ECONOMY OF THE UAE 6
The UAE government is very keen on the taxes and their system allows other countries to
also benefit from taxing their foreign nationals. Taxation is one of the important incomes
generating sectors for a company as it is imposed on all financial transactions that happen in a
country. every product which is sold within the borders of a country is subject to taxation and the
government ensures that all products are registered for taxation. High taxation on health hazard
products is necessary because the products deteriorate the life of people and force the
government to invest excessively in medical facilities. The revenue collected from the taxes
should be used to develop the basic sectors in the country that are of greater need and help in the
country, For example, the education, health, agriculture, and business sectors have to be
developed as they have a big impact to the economic state of a country. Some public services
should be free from taxation because they rely on the taxes for development and it would not
sound logical to develop a taxable public sector like a hospital. Implementation of taxes in the
UAE is vital in promoting the economic sector of the country and allows the country plan and
budget for the country’s needs.
IMPACT OF TAXATION IN THE ECONOMY OF THE UAE 7
References
Kagan, J. (2003, November 24). Understanding taxes.
Investopedia. https://www.investopedia.com/terms/t/taxes.asp
Kagan, J. (2008, October 9). Taxation.
Investopedia. https://www.investopedia.com/terms/t/taxation.asp
Pettinger, T. (2020, March 16). The impact of taxation. Economics
Help. https://www.economicshelp.org/blog/145810/economics/the-impact-of-taxation/
Santander Trade. (2020). UAE tax system –
Santandertrade.com. https://santandertrade.com/en/portal/establish-overseas/united-
arab-emirates/tax-system
UAE Government. (2019). Taxation. Home – The Official Portal of the UAE
Government. https://u.ae/en/information-and-services/finance-and-investment/taxation
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