With the New Year came the new tax implementation that shook the erstwhile carefree businesses of the UAE. There have been many opinions and discussion on this new aspect in the business world. But it is best for entrepreneurs to cast off their apprehension and delve deeper into what VAT would mean to their business.
The first question that crosses an entrepreneurs mind is ‘Does my company need to register for VAT?’
Companies in UAE whose value of taxable supplies is AED 375000 in a year or holds the potential to do so in the next thirty days must apply for VAT. If you are running a start-up and you expect your supplies and imports to exceed AED 187,500 then you must register for VAT.
Products and Services
VAT is applied on almost all products and services in the UAE. There are some goods that do not incur VAT. For such goods there is either a zero percent VAT or goods are exempted.
The difference between entrepreneurs who incur zero percent goods and those who are exempted is that the suppliers of the zero percent goods can easily reclaim VAT that they must have paid for their business. On the other hand, the suppliers who are exempted do not need to register for VAT at all.
The following fall under the Zero rate VAT:
- Export outside GCC
- Medical equipment
- Supply of commercial aircraft
- Buses and trains
- International transport services
- Investment grade precious metals
- Residential properties that are newly constructed or converted and
- Oil and Gas
The following fall under Exempt Rate:
- Residential Buildings
- Bare Land
- Local Public Transport Services
- Certain Financial Services
- Life Insurance
- Loans and Fixed Deposits
However it has to be noted that general insurance and fee-based financial services are chargeable.
Challenges that VAT implementation poses for business in UAE.
- Increased Cost:
Increased cost is the first challenge that every business is going to face because of the VAT implementation. Every business now needs to perform an added function, this function in turn comes with the added baggage of admin and implementation costs.
It is important that a business is collecting VAT correctly, complying with the new laws and doing the quarterly VAT reporting. This requires that a business completely update the IT and internal systems, train its employees in VAT processes and might also need to employ a financial assistant to help with the transition. This needless to say, is quite an expensive affair. The fact that that collection and remittance processes are self-assessed and any carelessness on the part of a business would result in hefty penalties does not make things any easier.
- Change in Structure:
Apart from having an added expense there is this another aspect that says that VAT will be charged at each stage of production and distribution. This implies that if a company has more than one business entity handling the same product or service then it is possible that a business is taxed on transfers made between different stages and therefore having to pay VAT twice. It is important that companies or businesses with this structure need to come together as one to avoid this added expenditure.
- Being Accountable to the Government:
A business that is VAT registered need to prepare and keep a range of business records for the government to assess. The government can ask any of the following:
- Annual Accounts
- General ledgers
- Purchase Day Books
- Invoices Issued and Received
- Credit and Debit Notes
It is important that a business maintain these records for a minimum of five years while making sure that they are valid and up-to-date.
- Rising VAT Rates:
It is possible that the VAT rates may rise in the future. This is a concern that every business wishes it away.
But like everything else, the implementation of VAT in UAE has both pros and cons. We have looked at what does not feel good. Let us take a look at the brighter side of VAT implementation and see if that outweighs the cons.
- Boost to Government Finances:
The new VAT is sure to bring in significant rise to government revenues. This would naturally create a more stable economy which is sure to benefit all the businesses in return.
- Improved Infrastructure:
The improved revenue will surely improve the UAE’s infrastructure. A great infrastructure will naturally make it easier for businesses to set up shop in UAE. Moreover it also means a less expensive way to do business.
- Non-Monetary Benefits:
A tax regulation can bring in a lot of benefits to a government that are not necessary financial. Improved liability management is one such benefit. The introduction of taxes will surely enhance government accountability and democracy. Moreover, a government that has Official taxation records that are well managed are more armed against civil fraud, corruption and waste.
- Business Efficiency:
The implementation of VAT will see all companies changing their accounting infrastructure. This would result in long term benefits because it would streamline a business’ accounting systems and replace the old and inefficient accounting systems.
- Distributed costs:
It is the consumer who has to pay for VAT and not the business. True the process of collecting and remitting VAT lies with a company but it is the consumer who is being charged by the sales channel.
- New Opportunity:
The implementation of VAT has opened a new opportunity for advisory firms that specialise in VAT policies. Many companies who do not have the time to engage in the new taxation system are seen to be outsourcing the whole process to these firms. Entrepreneurs who has the expertise can easily use this opportunity to start a new business venture.
Looking at the larger picture, VAT implementation is more of a benefit to businesses. Entrepreneurs who are still struggling to understand the system it is advised that they reach out to professionals for help. Welcome VAT with open arms and see it open up long term benefits for your business.