Ready for VAT?

Value added tax is com­ing to the UAE. Is the coun­try pre­pared for it?

Gulf Business - - FRONT PAGE - By Aarti Na­graj

Who will be hit hard­est and how can you pre­pare for the im­pend­ing tax?

With the im­ple­men­ta­tion of value added tax (VAT) in early 2018 in the UAE now a cer­tainty, there is grow­ing ap­pre­hen­sion in the mar­ket – from busi­nesses and con­sumers alike – about how the new regime will im­pact them.

De­tails about the tax are yet to be dis­closed, but of­fi­cials have con­firmed that it will be charged at 5 per cent with around 100 items set to be ex­empt. These are an­tic­i­pated to in­clude es­sen­tials such as food, ed­u­ca­tion and health­care.

Who will be hit hard­est?

“VAT is not a tax on sales; it’s a tax on con­sump­tion and it sticks with the fi­nal con­sumer,” ac­cord­ing to Martin Dane, as­so­ciate di­rec­tor of VAT and in­di­rect tax – UK at the au­dit and ac­coun­tancy firm RSM.

But with the ex­empt items ex­pected to in­clude hous­ing rent – the over­all ef­fect on cost of liv­ing may not be a straight 5 per cent; it may be less than that, opines Rakesh Par­dasani, part­ner at RSM.

“At a mod­est rate of 5 per cent and with cer­tain ex­emp­tions, I don’t think VAT will price out peo­ple,” he says.

“In some time it will be­come a part and par­cel of liv­ing in Dubai.”

The im­pact on con­sumers will be mainly psy­cho­log­i­cal as they will see “tax” for the first time, adds David Stevens, part­ner, MENA VAT im­ple­men­ta­tion at EY.

“The over­all im­pact on them though of around 2.5 per cent CPI is less than the usual an­nual in­fla­tion rate any­way, and may be less, given the cur­rent com­pet­i­tive mar­ket con­di­tions.”

So will busi­nesses feel the brunt of the new tax?

Con­sid­er­ing that the tax is passed on through the sup­ply chain un­til it fi­nally reaches the con­sumer, most busi­nesses can main­tain tax neu­tral­ity and in fact be­come tax col­lec­tors for the gov­ern­ment, ac­cord­ing to Dane.

But ex­perts ac­knowl­edge that there is go­ing to be a cost of com­pli­ance for com­plet­ing VAT re­turns – for keep­ing books of ac­counts and mak­ing sure that VAT credit is col­lected prop­erly.

Saulius Ado­maitis, part­ner of per­for­mance im­prove­ment ad­vi­sory ser­vices at EY says: “As VAT will af­fect most trans­ac­tions, busi­nesses will need to make sure that each and ev­ery sin­gle in­voice they get or issue is com­pli­ant, or they will not be able to claim VAT back.

“This will re­quire chang­ing or up­grad­ing their IT sys­tems and train­ing their em­ploy­ees and sup­pli­ers. If planned prop­erly, such a tran­si­tion may take 12-18 months.”

There­fore, the big­gest im­pact of VAT will be on busi­nesses, claims Stevens.

“Busi­nesses will have to come to terms with the stric­tures of do­ing busi­ness un­der a VAT com­pli­ance regime,” he says.

Will it dis­cour­age SMEs in the mar­ket?

Of­fi­cials have re­vealed that un­der phase

one, only com­pa­nies which record an­nual rev­enues of more than Dhs3.75m will be obliged to reg­is­ter un­der the sys­tem and will be taxed ac­cord­ingly.

Com­pa­nies that make an­nual rev­enues of be­tween Dhs1.87m and Dhs3.75m will be given the op­tion to ei­ther reg­is­ter un­der the first phase or wait un­til phase two.

This means the in­tro­duc­tion of VAT will not dis­cour­age SMEs, as many will not be part of the sys­tem ini­tially, ac­cord­ing to Stevens.

“It is adopted through­out much of the world with­out any such im­pli­ca­tions,” he says.

“It will how­ever, add to their costs if they are reg­is­tered, as they will also be sub­ject to the rules and com­pli­ance re­quire­ments fac­ing other busi­nesses.”

How­ever, Parasani sug­gests small busi­nesses that don't reg­is­ter could be at a dis­ad­van­tage.

“If they do not reg­is­ter, it may be a dis­ad­van­tage for them be­cause they may still have to pay on the in­puts that they pro­cure from the mar­ket which they can­not pass on to the end con­sumer.

“So yes, at the end their prod­uct may be 5 per cent cheaper than a big­ger or­gan­i­sa­tion but in terms of the process, they may lose out on some VAT credit. So that will ul­ti­mately add up at least some per­cent­age to their cost,” he claims.

“They will have to vol­un­tar­ily con­sider whether they want to reg­is­ter even though they are be­low the thresh­old limit,” he adds.

Prepa­ra­tion is key

Ex­perts ac­knowl­edge that the big­gest need of the hour is for busi­nesses to start pre­par­ing for the tax.

Firms must be­gin creat­ing aware­ness and in­creas­ing knowl­edge about VAT through­out their or­gan­i­sa­tion. This in­cludes as­sess­ing the po­ten­tial ef­fects of the new tax on their busi­ness, its im­pact on mar­gins and cash flow, ac­cord­ing to PwC.

“Com­pa­nies should take ac­tion now, if they have not al­ready, to pre­pare for the im­ple­men­ta­tion of the new tax sys­tems and be ready by the go-live date,” says Jea­nine Daou, Mid­dle East in­di­rect taxes leader at the firm.

While tal­ent is a prob­lem at present, VAT- ac­cred­ited per­son­nel have started com­ing into the UAE, adds Par­dasani.

“But prepa­ra­tion is the key – busi­nesses and even SMEs have to en­sure that they start get­ting into the dis­ci­pline of keep­ing books of ac­counts. Main­tain­ing proper records is es­sen­tial be­cause all that doc­u­men­ta­tion is key in claim­ing VAT and avoid­ing any penal­ties that may come be­cause of non-com­pli­ance,” he warns.


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