The lowdown on VAT in the UAE

Posted on Nov 17, 2017

The lowdown on VAT in the UAE

UAE is welcoming VAT on 1st January 2018 as with the roll-out of VAT (value added tax) in UAE is coming closer businesses as well as individuals is concerned about how this new levy of tax will affecttheir lives and incomes.

Everyone should be aware by now about the levy of tax in UAE as UAE will no longer be tax-free country; UAE is implementing 5% VAT from 1st January 2018. This implies all those residents/individuals and companies who have moved to the Middle East to enjoy the advantages of tax free or tax heaven country now should adjust.

As VAT is a new concept for gulf countries people are confused and struggling to adopt it in their framework, they don’t have much knowledge about what should be done as what they should do to prepare themselves for VAT, as per reports two out of three companies are struggling to implement VAT.

According to Sultan Al Mansouri, Minister of Economy, as the country is trying to diversify its reliance on oil revenues, introduction of VAT could generate Dh12 billion in its first year and Dh20bn in the very next year.

Seth Munhenzwa, Senior Finance Process Expert for the MENA region at Hilti Emirates, who is working to make his company VAT-ready by the time the tax is introduced and implemented, he answered some of the questions regarding what should be done to start preparing residents and companies for VAT, some are given below:

What will VAT mean for the average resident?

It will mean a 5% expansion in the cost of most goods and services those which are not considered as 'fundamental/basic needs'. Essential foodstuffs, residential renting and transportation are outside the extent of VAT, according to different purviews, these ought to stay unaffected.

Will the extra cost fall onto consumers? Or will costs be split?

VAT is a consumption tax and is passed onto the next person in the supply chain so definitely it will impact consumersmostly. Let us assume a situation where VAT-registered company deals with VAT-registered suppliers, all VAT paid on supplies is generally passed on to the customers, so there is nil impact on a VAT-registered company and its cash flow as well, as a dealer is entitled to input tax credit if he has purchased goods for resale. However, in the case of consumers, they are not VAT-registered and therefore pay VAT on purchases, yet they do not have a customer to pass it onto, since they are the last point of the whole supply chain so ultimately will bear the burden of VAT.

What can companies or consumers do to prepare for VAT?

All those companies who cross the threshold limit of a yearly turnover surpassing USD 100,000 should consider VAT experts instantly, so they can give advice on the subsequent steps to be taken, UAE customers are best instructed to visit the Ministry with respect to Finance site for more detailed, accurate and particular direction, and also the rundown of products and services which will either be exempt or zero-rated.

Do you think VAT will be a good thing for the UAE?

Indeed, since it will be an additional source of income for the nation's economy. As we all know Gulf countries economy was mostly reliable on hydrocarbon (oil and gas), however with new technology and developments countries are shifting and diversifying their sources of revenues so they can rely less on oil (regarding global oil prices has made the sector unreliable as a primary source of income), introduction of VAT will definitely be a good decision for UAE.

Will residents notice a significant difference once VAT is implemented?

It's hard to evaluate, yet I would like to say, no. I say this on the grounds that most essential things (basic food items and services) are expected to be absolved/exempt from VAT.

Which products are exempt from VAT?

One should visit Ministry of Finance site for a comprehensive rundown, basic food items, transportation, residential renting are exempt from VAT.

Is it clear when VAT will be enforced?

Yes, the GCC announced the introduction of VAT from 1st January 2018.

What are the first steps to help a company prepare for VAT?

Accordingly, in the initial phase, one should consult a tax consultant or tax expert to know VAT better and to understand the impact of VAT in his business as it will involve analyzing the whole process of the business and its transactions to identify the impact of tax.

Do you predict that international companies will now be exiting the UAE once VAT has been implemented?

As VAT is a common tax which is implemented in most of the countries all over the world with slight change in rates and mechanism but still it is difficult to predict about the exact impact of VAT on international companies, I emphatically accept numerous international companies are not headquartered here fundamentally for just the cost, but instead for geology's purpose and different contemplations. I don't think the UAE is fundamentally the nation where it is the least expensive to work together at present.

50% of companies aren’t prepared for VAT. Is there a reason why?

It's a mix of reasons, where the main reason, however, is that most companies were trusting that the GCC VAT system would be acknowledged first by GCC governments as an affirmation that VAT would be actualized on 1 January, 2018. However this didn’t happen, yet some legislatures, UAE and KSA, have conveyed that they are proceeding with the previously mentioned implementation date.

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