More number of businesses to come under the VAT ambit.

Jojo Puthuparampil is a business news writer for Inc. Arabia.

UAE government’s Federal National Council (FNC) has approved a draft law that requires business owners and landlords to pay a 5% value-added tax (VAT) starting January 2018.

According to the new law, private businesses making Dhs375,000 and more a year will have to pay VAT. This threshold is significantly lower than the Dhs3.75 million that was proposed earlier.

The tax is binding on landlords renting out properties as well, which could lead to a rise in rents for tenants across the UAE.

There are currently more than 450,000 private owned companies in the UAE, and the number is expected to soon reach 600,000, which will see a growth in the annual GDP, said Obaid Humaid Al Tayer, minister of state for financial affairs.

The effect of VAT on people in general, including residents and consumers, will start with 1.3% and will drop with time, whereas businesses will face 0.06% and 0.04% on gross domestic product (GDP) growth when implemented, the minister said.

The law will also provide the authority measures to address procedures for tax collectors, tax auditing, tax avoidance, violations and the penalties.

The passed draft law also stipulates that fines for those avoiding the pay their taxes should not exceed five times the value of the evaded tax.

The minister said that by 2021, the government aims to generate 80% of UAE’s economy by non-oil sectors, while the remaining 20% generated by oil.

Last year, the six Gulf Cooperation Council (GCC) countries, including the UAE, Saudi Arabia, Qatar, Bahrain and Oman, signed an agreement to implement a 5 % VAT, despite administrative and technical challenges.

However, economists and officials have previously opined that simultaneous introduction in all countries may not be feasible as creating the administrative infrastructure to collect the tax remains a challenge.

It is also difficult to train companies to comply with the news tax in a region where taxation is minimal.

Now GCC governments are planning for early, simultaneous adoption, said Younis al-Khouri, under-secretary at the UAE finance ministry. By January 1, 2018, UAE is aiming to adopt 5% VAT across the GCC, he said.

The UAE government expects around Dhs12 billion ($3.3 billion) of revenues from the tax in its first year. That would be about 0.9% of the UAE’s gross domestic product of $371 billion in 2015.

The tax will also lead to an increase in UAE government’s revenues to $5.45 billion (Dhs20 billion) in 2019 from $4.90 billion (Dhs18 billion) currently.

However, UAE had reportedly ruled out plans to impose corporate and income tax.