With the introduction of VAT beginning 1st January 2018 in GCC states, incuding the UAE, Gopal Aswani, partner at the Dubai based Essentially Precise, explains the impact of VAT, as well as what a business needs to do to comply with VAT.
This is it! The moment is nearly here where we will soon lose our right to brag “Tax? What Tax?” or “We don’t have to pay it in the UAE.” Followed by “No Way! You pay that much? Poor you”, when replying back to your counterpart business from Europe or any other Tax receiving nation.
Yes…it’s true. The UAE (The United Arab Emirates) will be introducing VAT (Value Added Tax) on 1st January 2018. The GCC (Gulf Cooperation Council) states’ involvement will also be crucial to ensure a successful & uniform roll out.
VAT is said to be set at 5% and there will be an exemption on what is estimated to be 150 food items, education and healthcare.
Businesses & consumers will naturally be impacted. We evaluate next how and what the impact could be, as well as what a business needs to do to comply with VAT.
What is VAT (Value Added Tax)?
VAT is considered world-wide to be one of the healthiest forms of taxation & has been accepted by many leading economies. Currently, it’s used in more than 150 nations, after France introduced the concept more than 50 years ago.
What is interesting about VAT is that the businesses essentially collect tax on behalf of the government from their consumers and pay the same back to the government.
The concept of Value Added Tax, is that there is a tax levied on the Value that is added on each stage of the supply chain.
As the product or service goes down the Value Supply Chain there are 2 key points to keep in mind.
- A business gets back the VAT paid while purchasing when it further sells these the goods or services on to the next consumer/business
- Hence the end-consumer eventually pays the final VAT
To help illustrate:
So, Value added tax or VAT is an indirect tax, which is imposed on goods and services at each stage of production, starting from raw materials to the final product.
Having VAT in the UAE is important
At the end of the day, the Government, the UAE is an entity which needs funds to operate.
It provides us citizens and residents with different public services – including hospitals, roads, public schools, parks, waste control, and police services which are paid for from the government’s budgets.
To sustain these improving services and further grow the economy, the UAE needs income. At the same time the GCC along with the UAE are very well aware that they have to place their financing on alternative (more sustainable) streams, i.e. moving government income away from the dependence of oil and gas revenue.
Therefore VAT will provide the UAE with a new source of income which will contribute to the continued provision of public services.
It is very important to do so now, before oil and gas reserves run out, ensuring no sudden shortfall for the government.
VAT cannot be implemented in a vacuum, other GCC states would work together in designing and implementing the new public policies.
The Revenue from VAT
VAT will generate a considerable amount of funds according to Ernst & Young. The public accounting firm mentioned that 5% VAT will produce an extra income of more than $25 Billion (Dhs.91.8 billion) annually for the 6 GCC countries.
According to Obaid Humaid Al Tayer, Minister of State for Financial Affairs, for UAE it is estimated to generate Dh12 billion in the 1st year and between Dh18 billion to Dh20 billion in the 2nd year, as told to the Federal National Council last December 2016.
Roll out of VAT
There is a 2 phased approach being considered.
Companies in the UAE that record annual revenues over Dh3.75 million will be obliged to register under a VAT system, and will accordingly be taxed, according to Younis Al Khoury, undersecretary at the country’s Ministry of Finance.
Companies whose revenues are between Dh1.87 – Dh3.75 million can register should they choose to during the 1st phase.
Al Khoury said, however, that it will eventually become mandatory for all businesses to register under the VAT system when it is finally rolled out in Phase 2, but the ministry is still to decide when.
Key steps for a business in a VAT economy
Businesses likely to be affected by VAT are said to have 18 months once the legislation is enforced to ensure requirements are met to fulfil their tax obligations.
Have a look at the infographic to understand the anticipated process involved with VAT.
INFOGRAPHIC: VAT Process Rollout
From a legal perspective, non-compliance with tax laws will have legal ramifications and may in the near future attract penalties/fines. So adequate financial, legal and due diligence is key, as well as re-mapping the process as we get ready for a new way of conducting business.
Companies will have to have their accounting processes in place so that they can record what they have charged and inform the government about the same.
This is a different process from the current more private approach to transactions, under which a company and its customers have no requirement to inform other entities about the costs, nor have they been legally liable for doing so. Therefore, while the government is preparing for the arrival of VAT, the commercial sector needs to have its checks and balances in place.
Impacting End consumer
The big question often asked is: How bad will this impact end consumers? The answer is not as scary as one may assume.
The rate of VAT that is being rolled out will be one of the lowest compared to other VAT bearing nations. Sweden is at 25%, Hungary with the highest at 27%, Australia at 10% and so forth.
Essential food, healthcare and education will not carry VAT.
The impact of VAT is expected to be minimum, however it really comes down to your lifestyle. According to an article by Sonja Stephen on EmiratesWoman.com, the retail sector will be protected as much as possible, with price increases not being significant enough for mid-low income earners. Of course larger purchases will experience a bigger VAT expense such as cars and luxury purchases.
So yes prices will increase marginally, and in terms of inflations – Dr Nasser Saidi, president, Nasser Saidi & Associates, clarified that the initial impact would be with the consumer as this is a consumption goods tax, and this 5% increase will be a once-for-all impact on prices, which will experience a short term inflation increase during VAT implementation. No continuing effect on inflation is expected.
Shan Saeed, chief economist at IQI Holdings Malaysia, said that the actual contribution towards inflation would be a mere 1-2% which is not enough to reduce consumer spends. Saeed also added that countries that are following VAT are stable.
And for those who feel that VAT could be a start of a new string of Taxation based government initiates such as the “Income Tax.”, the exciting update is that the UAE has no plans to start new taxes on individuals and the government is not planning to bring in additional fees for services, according to Younis Al Khoury (Under-secretary, finance ministry – Nov 2016).
VAT is inevitable, and it’s pretty much around the corner, we simply do need to accept it as one of the many upgrades, changes and alignments the country does to improve and become a stronger economy.
Overall the pros outweigh the cons and as you breakdown the reasoning, it is an important requirement of the nation. Let’s also not forget that these new processes will bring in more jobs and eventually increased salaries. Keep note that the UAE may have a “Teething” phase, and like all things UAE, it will eventually be fine-tuned, becoming a normal way of conducting business.
One thing is for sure though…our right to brag in being a Tax free nation, just got taken a notch lower.