In this candid interview, Chairman of The Institute of Chartered Accountants of India (Dubai) Chapter, Mahmood Bangara, talks about VAT implementation in the UAE and their implications on business. He assesses post implementation of value added tax (VAT) in the UAE, business transactions have become more transparent and businesses are becoming more serious in complying with the procedures, requirements and regulations of VAT.
You were part of several awareness campaigns to educate businesses here in the UAE on VAT. In brief, can you demystify VAT for us?
Value Added Tax or VAT is a tax on the consumption or use of goods and services levied at each point of sale. VAT is a form of indirect tax and is applicable in more than 160 countries around the world. The end-consumer ultimately bears the cost. Businesses collect and account for the tax on behalf of the Government.
Value Added Tax (VAT) was introduced in the UAE on 1st January 2018. The rate of VAT is 5 per cent. VAT will provide the UAE with a new source of income which will be utilized to provide high-quality public services. It will also help government move towards its vision of reducing dependence on oil and other hydrocarbons as a source of revenue.
With the introduction of VAT, what are the challenges for companies operating in the UAE and the region?
Companies or business enterprises operating their business in UAE are likely to face cash flow issue initially after the implementation of value-added tax (VAT). If value-added tax system is not implemented correctly, it may become an extra cost for the business. Additionally, extra penalties would be charged by the Federal Tax Authority (FTA), when VAT Returns are not submitted on timely basis or VAT Payment is not made to FTA on time. All businesses in UAE must reassess all their business transactions carried out since implementation of VAT in UAE, to determine, if VAT has been appropriately applied in all their business transactions or not.
How well has the UAE economy incorporated the new taxation policies?
The United Arab Emirates’ introduction of value-added tax has gone smoothly. The 5 per cent VAT rate imposed at the start of this year was a big cultural and administrative shift in a country that has traditionally had almost nil or minimal taxation. Given the challenges, VAT implementation has been well managed and relatively smooth. Annual consumer price inflation jumped to 4.8 per cent in January 2018, the highest since 2015, but dropped back to 3.4 per cent later during the year.
What are some of the legitimate opportunities businesses can use to lessen their VAT burden?
Use proper VAT compliant and FTA approved accounting softwares for recording all transactions and maintain proper and adequate documents for supply, payments, delivery and receipt. Also, by issuing proper tax invoices to customers and receiving and retaining proper tax invoices from their vendors, by filing VAT returns and making VAT payments on time, the businesses can lessen their VAT burden.
What is VAT digitization? how do companies benefit from digitization?
As businesses transform through digitization, VAT compliance procedures and tax administration controls are also moving rapidly into the digital phase. They are using technology to improve tax administration and facilitate tax compliance. Most tax administrations now require electronic filing of periodic VAT returns. Every aspect of how tax and customs authorities operate is being transformed by technology — from the collection of taxpayer data to how tax and customs administrations conduct audits and inspections.
By using technology, tax and customs administrations are able to carry out more audits, including more off-site and post-clearance audits, and perform them more efficiently and more thoroughly. As a result, e-audits may uncover more errors, leading to more assessments and higher penalties for taxpayers.
Digitalizing VAT related documentation will help organizations automate internal procedures, provide a convenient storage archive that can be referred to at any time, and meet the tax authority’s prescribed document retention requirements.
Can you brief on VAT applicability on UAE Free Zones? What should companies and individuals be aware of operating from Free Zones in the UAE?
First and foremost point which businesses need to take a note is that ‘All Free Zones’ may not be designated zones which enjoy special reliefs under the VAT law of UAE. This is evident from the definition and provisions defined in the UAE VAT Law and Executive Regulations. In UAE VAT Law, the specific areas in UAE which are eligible to enjoy certain special provisions with regards to the applicability of VAT are called ‘Designated Zones’ and the Executive Regulations prescribe the conditions which a Designated Zone needs to fulfil.
For VAT purposes, both fenced and unfenced Free Zones are considered to be within the territorial scope of the UAE – and therefore subject to the standard VAT rules applicable in UAE – unless they fulfil the criteria to be treated as a Designated Zone as defined by the VAT Decree-Law and Executive Regulations. Those Free Zones which are classified as Designated Zones by a Cabinet Decision (Currently, there are 23 notified Designated Zones in UAE) are treated as being outside of the territory of the UAE with respect to applicability of VAT with respect to certain specific supplies of goods. In addition, there are special VAT rules in respect of VAT treatment of certain supplies made within the Designated Zones. The effect of these rules is that certain supplies of goods made within Designated Zones are not subject to UAE VAT. In contrast, supplies of services made within Designated Zones are treated in the same way as supplies of services in the rest of the UAE.
Designated Zone businesses are considered to be established ‘onshore’ in the UAE for VAT purposes. This means that they have the same obligations as non-Designated Zone businesses and have to register, report and account for VAT under the standard rules, wherever the special provisions in relation to VAT for Designated Zones are not applicable. It also means they can join a tax group (VAT group) provided they meet the required conditions.
You are the Chairman of The Institute of Chartered Accountants of India (Dubai) Chapter. What are some of the key objectives, contributions and initiatives planned by ICAI for 2019?
We, ICAI Dubai Chapter are at the forefront of spreading VAT Awareness in UAE from the initial stages itself when the VAT Decree Law in UAE was issued in second half of 2017 and have conducted several workshops, seminars and webcasts during the last 18 months and are regularly conducting VAT certificate and refresher courses, with the focus of these refresher courses being on the new cabinet decisions and public clarifications issued by FTA, on an ongoing basis. We will be hosing the International Taxation Seminar on 8th Dec 2018 in Dubai to throw light in to the tax exposure and effective tax management from an international perspective.
UAE, VAT, VAT digitalization, Mahmood Bangara, UAE Free Zone VAT, The Institute of Chartered Accountants of India, ICAI