Value Added Tax- A Future Reality in UAE

Value Added Tax- A future reality in UAE

Value Added Tax (VAT) was introduced for the first time in France in 1954 and today more than 160 countries have accepted and implemented the same or similar type of general consumption tax. With the declaration of implementation of Value Added Tax regime by Gulf Cooperation Council (GCC) from January 1, 2018, or by January 1, 2019, UAE and other GCC members becomes a recent cluster of countries to join this league.

With acceptance of VAT system, whole new ambit of Indirect Taxation is going to be emerged in UAE, In this scenario let’s discuss VAT system in detail

What is Value Added Tax?

Value Added Tax (VAT) is an indirect tax on consumption and it applies to most of the goods and services. VAT is levied on business transactions, i.e. on goods and services supplied in the normal course of business.

Generally, VAT applies to most of the goods and services but there are some exceptions too. While VAT is levied and paid by producers to the authorities, the actual tax is collected from customers or end users who purchase these.

Working of VAT

The below given flow chart explains the working of VAT system along with Output and Input Tax

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Let us understand the same with the help of a numeric example:-

Particulars Example 1 Example 2 Remarks
Business charges VAT on Sales 20,000 15,000 Also termed as Output Tax
Business Pays VAT on Purchases (10,000) (19,000) Also termed as Input Tax
Net VAT 10,000 (4000) 10,000- Payable to VAT Authorities

(4000)- Receivable from VAT Authorities

 

Necessity of Value Added Tax

After the fall of crude oil price, the International Monetary Fund (IMF) has recommended GCC for the fiscal consolidation through diversification in government revenues and reduction in subsidies.

Now the Government is looking to diversify the income sources, Imposition of Value Added Tax is one such diversification move through which UAE is expecting a Dhs 12 Billion from the tax revenue in the first year and in the long run it is estimated to generate a yield of 2.7 percent of non-hydrocarbon GDP.

Rate and Applicability of Value Added Tax

VAT is expected to be introduced at a rate of 5% with some limited exceptions including basic food items (94 items), healthcare and education.

Companies Covered under Value Added tax

  • During the first phase of rolling out the system, the Companies whose revenues range between Dh1.87 million and Dh3.75 million will have the option to either register under the system or not
  • Companies in the UAE that record annual revenues over Dh3.75 million will be obliged to register under a Value Added Tax (VAT) system

 

Effect on the Consumers

Compared to other parts of the world, 5% VAT rate is at the lower side. Also, the basic necessity goods like food items (94 items) ,essential services like health care and education are kept out of the purview of VAT  hence the impact of VAT is not seen as drastic among the common man.

The most impacted will be consumers of  high-end goods, electronic devices, cars, jewelry, and other luxury items.

Effect on Business Houses

The implementation of VAT will lead to increased administrative and compliance cost for the companies. Companies will also have to equip their organisation with professionals from Accounting,documentation and IT systems to tackle with the changing business and compliance environment.

Role of Business House in changing environment

  • Need to amend systems, processes and procedures
  • Need to ensure that they comply with the new requirements
  • Identify VAT implementation strategy
  • Identify business transaction including inter- company transaction
  • Identify the Internal controls for proper recording and presentation of taxes
  • Setting of world class accounting system
  • Maintenance of financial records in a timely manner
  • Identify products/services require VAT
  • Undertake Training/awareness

How Can Emirates Chartered Accountant Group help you?

  • Our strategist can devise mechanism for effective and efficient implementation of VAT system in your organisation
  • Our Internal control experts will be Identifying the internal control weakness and bring in an effective internal control mechanism.
  • Identification of products and services of your organisation which comes under the ambit of VAT by our VAT experts
  • Professional service for setting up robust in-house accounting system will be provided.
  • One has to record the transactions in a timely manner so as to adhere to the VAT Regulations. We also act as a backhand service provider who records transactions for clients in a timely
  • Identification of products and services of your organisation which comes under the ambit of VAT by our VAT experts.

Emirates Chartered Accountant Group sees the introduction of Value Added Tax regime by GCC as a positive move towards bringing more sources of revenue generation into the of government revenue basket, but before rolling out the VAT system lot of grass root level work has to be done to make VAT System as a success.

 

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