Value Added Tax (VAT) has been introduced in the United Arab Emirates for the first time.

The 5% levy is being applied to the majority of goods and services.

The Gulf state has long attracted foreign workers with the promise of tax-free living, but the government wants to increase revenue in the face of lower oil prices.

It estimates that in the first year, VAT income will be around 12 billion dirhams (£2.4bn; $3.3bn).

The tax kicked in at 07:00 local time ( 03:00 GMT) on 1 January.

No plans for income tax

Petrol and diesel, food, clothes, utility bills and hotel rooms all now have VAT applied.

But some outgoings have been made exempt from the tax, including medical treatment, public transport and school fees,

Economists have estimated that VAT will increase the cost of living for residents by about 2.5%.

Organisations such as the International Monetary Fund have long called for the UAE to diversify its sources of income away from oil reserves, which accounts for roughly 80% of the country’s revenues.

It has already introduced road tolls and a tourism tax, as well as adding fees to services such as vehicle registration.

But there are no plans to introduce income tax to the country, where most residents pay 0% tax on their earnings.

The other members of the Gulf Co-operation Council – Bahrain, Kuwait, Oman, Qatar and Saudi Arabia – have also committed to introduce VAT, though some have delayed plans until at least 2019.

courtesy= bbc.com