VAT is the ‘talk of the town’. Almost everyone in the business world is talking about VAT and concerned about its implications on business as well as consumers. AAMISH NAWAZ provides you with the basics of VAT and presents key information for businesses to survive through this critical juncture.
As VAT is an indirect tax paid by the consumers, theoretically, it should not have any repercussions for businesses, but businesses are the ones to pre-pay the tax along the supply chain until ultimate recovery at the point of sale. Thus, businesses do have motive to be worried about impact of VAT in terms of cash requirements, record keeping and administration of effective VAT system to avoid financial and non-financial penalties from Federal Tax Authority.
VAT has the potential to change strategic outlook of the economy as a whole. Businesses have to be more pro-active, lean, economical and ethical to survive in a post-VAT world. Organisations may have to restructure their organisational and business models to stay afloat and competitive.
The most recent challenge faced by business community is the implementation of VAT. VAT implementation essentially requires
- Impact assessment; and
- Change management
Businesses must assess the impact of VAT on their existing business model. They must assess the expected financial, strategic and tactical footprint of VAT. Because of it, businesses may have to re-shape and re-design their organisational structure, supply chains, budgets, cash flows and prices which necessarily mean transitioning from old, established traditions to new practices. Managing this change can be a daunting task. Hence, successful implementation of VAT would require a robust Change Management framework at its core.
In practice, each business has a different operational model and requires tailored VAT implementation planning, which should be fully aligned with the operational priorities and risk appetite of the business.
VAT promises to have both qualitative and quantitative impact on how an organisation functions. On the qualitative side, the organisations would need to develop and implement proper VAT Governing System which entails:
- Hiring of quality staff to cope with VAT requirements;
- Changing the work environment and culture where record-keeping is of utmost importance; and
- Changing business ethics in a sense that every transaction should be accounted for and properly recorded;
On the quantitative side, organisations need to implement appropriate financial and internal control measures to capture the end-to-end VAT accounting process. So, an improved tax risk management model should be designed which will provide for periodic testing of controls to guarantee the effectiveness of VAT-critical processes. The VAT implementation planning should focus on both the operational and technical aspect of the business that must be aligned with the key business objectives of transactional integrity and financial reporting accuracy. Organisations must also set budgets for VAT pay-outs. They need to ensure liquidity as and when VAT payment is due; else they would have to pay financial penalties which would be detrimental to the profitability at the end.
The next challenge faced by organisation is to manage change. Implementation of VAT inevitably requires transformation. Change in the financial management system, change in the organisational work culture and change in Human Resource Management. However, market researches in the UAE are indicating that most of the businesses in the UAE are far from achieving successful VAT implementation.
Businesses have to be more pro-active, lean, economical and ethical to survive in a post-VAT world.
“Over 60 percent of 100 senior decision makers and finance professionals in both the public and private sectors in the UAE said they have not allocated a budget for the new tax’s application, while 52 percent said they have not set an implementation strategy for the new tax, according to a survey by Dubai-based recruitment consultancy firm Hays.”
There are several factors which would cause hindrance to the successful implementation of VAT in an organisation. Most common factors faced by SMEs in the UAE regions are:
Accounting and IT system
Good accounting system and a developed IT infrastructure helps businesses minimise the chances of VAT error by incorporating all the required changing as per the legislation and handle complex transactions. Most of the SMEs are using small off-the-shelf accounting systems not tailored to the requirement of the business, rendering them unable to handle the VAT complexity.
Proper documentation is the key factor for the successful implementation of VAT process. A poor documentation of critical VAT processes means corporate record retention requirements have not been considered adequately and may cost the company considerable financial penalties by the tax authorities.
In UAE region, companies are not accustomed to the tax regime and thus, never required any tax expert in the business. There is a clear shortage of adequate human resource in the region regarding VAT implementation and compliance.
Most of the issues discussed above can be resolved by planning in advance and by allocating appropriate financial and non-financial resources to implement VAT and Change Management.
In addition, an organisation has to prepare and adopt a tax management policy and strategy. An effective tax policy is a dynamic framework for leading organisations and is shaped by various internal and external factors. An effective VAT strategy should cover all business locations and should be aligned to the overall business strategy.