Value Added Tax (VAT) is set to make its debut in the six-nation GCC block in 2018. But what is VAT? How does it affect the common man? We attempt to answer some of the most commonly asked questions in this primer below.
What is VAT?
VAT will be another source of raising revenues for governments in the Gulf Cooperation Council (GCC).
It is estimated that the UAE will generate more than Dh12 billion additional revenues in the first year after implementation of this new tax.
GCC countries have decided to implement taxation as part of the governments’ efforts to diversify revenues in the context of sharp decline in oil prices. The International Monetary Fund has been recommending fiscal consolidation in the GCC through diversification of government revenues and reduction of subsidies.
When will VAT be implemented?
VAT will be introduced in the UAE, along with other Gulf countries, from the beginning of 2018 at 5 per cent.
How does it work?
Companies in the UAE that report annual revenues of over Dh3.75 million will be obliged to be registered under the GCC VAT system, the Undersecretary of the UAE Ministry of Finance, Younis Al Khoury, said.
Al Khoury also confirmed that companies whose revenues fall between Dh1.87 million and Dh3.75 million will have the option to register for VAT during the first phase of the VAT implementation.
He also mentioned that it will eventually become obligatory for all companies to be registered under the system, when it is rolled out in the second phase, regardless of the reported revenues.
Will everything be taxed?
The UAE will remain tax-free in many ways even after the implementation of VAT as there is no income tax on salaries in the country. Free zones in the country also offers tax free environment including 100 per cent foreign ownership in free zones, ease of doing business.
The government is likely to use its ability to either zero-rate or exempt many supplies most likely to impact the common man to ensure that the impact of VAT is kept to a minimum.?Essentially, the intentions of most governments when introducing a VAT is to focus more on taxing discretionary spend by consumers, while ensuring that those at the lower end of the spectrum are protected and assisted.
What will be exempt from the tax?
The UAE government has already announced that 100 food items, health, education, bicycles, and social services would be exempted from VAT.
What will be taxed?
Electronics, smart phones, cars, jewellery, watches, eating out, and entertainment will fall under the taxed category. GCC countries are also expected to introduce excise duties on certain beverages that are deemed to be harmful to health, including those with high sugar content.
Will VAT be a cost to the business?
Where you are engaged in the supply of goods or services that are subject to VAT (including at the zero rate) you will be entitled to reclaim VAT you incur on costs. Where you are engaged in activities that are exempt from VAT and you cannot reclaim VAT incurred on costs, VAT will be a cost to your business (as suppliers will charge VAT that you cannot reclaim).
Will it affect prices/margins?
VAT is a tax on consumption and is levied on the price charged to the customer. Therefore it is expected that prices will increase by the amount of VAT. However, it is ultimately a matter for suppliers to determine the price of their goods/services. The price will need to take account of VAT, i.e. whether you charge Dh100 or Dh105, the amount will be deemed to include VAT.
Do I need to start preparing for VAT? What should I be doing now?
There is a relatively short time to consider the implications of the introduction of VAT and to make the necessary changes. The amount of work required will depend on the size and complexity of your business and it is essential you consider the impact now and determine how best to deal with it.
Why is VAT being considered by the GCC?
Governments have been considering the need to diversify income sources and this is even more the case given the developments negatively affecting government revenues in the region such as reduced income from oil revenues.