Countdown to VAT: are Gulf businesses ready?

The new economic landscape will pose unprecedented challenges to businesses, particularly small- and medium-sized enterprises

Shawan Bennet

Thanks Clare McColl, your article is meaningful on VAT implementing 2018 in UAE and GCC. VAT is expected to be introduced at a rate of 5% at the start of next year with some limited exceptions including necessary food items, healthcare, and education. Then they should raise people's salaries and the economy should first be well established and high instead for a few years.

http://www.vatuae.me

One Guy

@ shawan, not a chance.........salaries are only going down. The goose is cooked.

Diya Pardasani

I feel with VAT in place from 2018, retailers, SMEs will figure out ways of Tax-evasion as it happens in most of the developing economies unless authorities have figure out smart ways to track it. We will get to see lot of innovation.
Whether VAT collected is remitted to respective govt authorities or abused by collectors, the bottom line is consumers have to shoulder it. I will support one of the comments above, smart buying is the only way out. Change in life style. Compare cost of product to its value.
First year of VAT implementation may see drop in surge of luxury products with eventual impact on consumer buying power. Corporates may see dip in their net earnings. They may see it as internal pressure to compensate employees with salary raise in accordance with VAT. A must policy that companies must include in R&R and follow it.
Above all, we know VAT is here and must prepare ourselves to embrace it.

Alan Godfrey

Taxing the People, Produces Avoidance, and a Black Economy.

GMB

If a company is below the minimum threshold they don't have to pay VAT. I don't know why everyone is talking about SMEs, the threshold is mainly very large corporations with high revenues. VAT is not being applied on all types of businesses, big and small.

One Guy

Fitch said in its statement that GCC-based companies will have to replace or update IT systems, implement new procedures and train staff before VAT is introduced, which will be "particularly burdensome as it will add to costs when low oil prices and lacklustre economic growth are weighing on corporate performance, particularly for SMEs".

MT3

If this is implemented in a similar way to many other countries, even those under the threshold should check carefully as it might be in their interest to register. Registered suppliers will charge VAT for goods/services they supply to both registered and unregistered businesses and the only way to recover it will be to register for VAT yourself, charge VAT to clients and net the amount off against the input VAT suffered. If you don't register you will still pay the VAT on your businesses supplies which will increase your costs and you might struggle to pass that on to customers. It will depend upon each business but don't automatically assume if you are below the threshold you are best off not registering - you might be able to substantially cut the VAT impact on your business by doing so. For many businesses the cost of accounting for VAT is not high and most basic accounting packages will suffice.

SA1

the threshold is $100000 of annual revenue which is quite low and will include almost all businesses.

One Guy

If that's the case then it would add even more complexity and cost to the back end administration for the Gov. to verify who qualifies and doesn't, who is collecting, collecting what and when and on what items.

For a consumption Tax to be most effective for all concerned it needs to be broad based and simple to apply.

As there is no real detail out there as of yet on these matters (which I am sure for business is a hug concern) then let us wait and see how it all pans out.

Balan Singh

More than likely it will be a Sales tax on Consumer products borne by the final customer. VAT is too burdensome administratively to consider.

There might be exempt Items e.g. food kids clothes etc.

Do expats really believe they can enjoy, Metro, Roads, World class facilities and safety etc for free indefinitely. Someone has to pay and the municipality fee on dewa isn't enough to cover the Bill.

The GCC will be forced by the IMF to go the way of other developed economies

SAM

You are right John, nothing is for free, but certain government expenditure that makes the quality of life what it is in UAE include security (all branches), which is a major expense that is increasing, while oil revenue is decreasing. The bottom line is that the government needs more funding; taxation is the quickest (though not most effective) way to fill any gaps in spending. I am not privy to the government's budget, but I am sure they are running a deficit and taxation is one tool to cover some of that deficit. I imagine there may be better ways to manage the deficit, but I guess this issue is worldwide.

John

SAM, when I lived in Dubai in the recent past, almost every government service had to be paid for, and of course there were road tolls and municipality taxes (along with sewerage, garbage etc fees on Dewa bills), land department fees and so on. Eating out at licensed places meant 20% taxes (half to hotel and half to government)
You make it sound as if there are government services which people use for free, and as such need taxes to fund them.

SAM

You make a sound argument. In Canada, VAT replaced an inefficient tax system that impacted producers who paid different input taxes at varying rates. VAT put the burden of tax on the final user instead and it makes sense. Regardless of how we look at it, it is a way for the government to obtain funding. I also think that VAT administration is cumbersome and this region and its mentality will make it impossible to enforce. The best way to go about it is to impose a sales tax on specific industries and products that businesses collect from end-users and remit to the government. This will have a negative impact on the economy, but so will potential worsening government services due to lack of funding. In the end, it is a balancing act and having faith the tax revenues will be put to good use and positively impacting growth.

Hansol

As yet with less then a year to go there has still not been any detail released on how it will be applied, which supplies will be exempt, which supplies will be zero rated etc. VAT is a simple concept but very complex in its administration. i.e will every airfare have 5% added to it etc?

One Guy

VAT is going to hurt thousands of small business across the UAE. Why? Because the cost and complexity of administration for many of these micro businesses - think corner groceries, laundries, souk operators etc will be more than what the business can sustain. Many will not act and fall behind on payments, receive fines for doing so and then close as a result. This is exactly what happened in Australia when the 10 % GST (VAT) was introduced.

Further, in the lead up to and after the introduction of the VAT every business put prices up by far more than 10%, this lead to a massive bout of inflation, cost of living and eroded the disposable incomes of millions of people. This will no doubt occur in the UAE adding to an already grossly over inflated cost of living. This will greatly affect retail spending and thus employment. Not a good idea.

One Guy

Glad my comment has sparked some debate. The cost of living in Australia since the introduction of the GST in the year 2000 has risen by 150%. This is not down to the GST alone.

What I am trying to put out there is that there are "unintended consequences" that arise from the introduction of new taxes and these typically impact small business and middle to low income earners.

There is no reason to doubt that this will not occur here in the UAE when the VAT is introduced, there will be the typical gouging, price rises and additional costs if doing business all of which will be passed on as always to the consumer. This will contribute to an increased cost of living at a time where few can afford it and as a result discretionary spending will reduce.

Andy

Cost of living depends on how you choose to live. You can eat at small places in Bur Dubai where a meal costs 10 dhs rather than go to a 5 star hotel. And you can use public transport or buy a Toyota Yaris instead of an SUV. The UAE is how expensive you make it to be.
As for VAT, I have been reading the news and most experts and business leaders are welcoming it as it will improve the economy by diversification, so the bigger picture scenario seems be that the overall economy will gain.

khalid sadary

For SMEs cash is used as it is earned a lot of such businesses have limited working capital and daily cash flow via sales is vital for survival. I wonder what happens to an SME when it collects the VAT uses it up and is then unable to pay it to the relevant taxation authorities. Will the owners be fined or even sentenced? How will policing be carried out to catch SMEs for not declaring the true VAT received?

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