By Parag Deulgaonkar
Firms selling small value items face major issues, says tax expert
Some companies in the UAE are likely to absorb value added tax (VAT) and hold prices at the pre-tax level, according to a senior tax consultant.
The UAE will implement 5 percent VAT from January 1, 2018 and companies may keep prices the same in order to maintain or gain market share.
“The introduction of VAT does not simply mean you add 5 percent to the current selling price, collect it from the customer and pay it to the government,” said Brian Conn, partner, tax advisory services, BDO.
“But before getting to that point, a company has to take a strategic decision on whether to raise prices or hold prices for a while and absorb some or all of the VAT in order to gain market share.”
Conn said companies in countries with established VAT systems do tend to absorb VAT and expects some UAE companies will follow suit.
Even if companies in the UAE decide to hike prices, the tax consultant said there are many consequences to that decision.
“Firstly, it is essential that contracts allow for the price to be increased by addition of VAT. If this is not addressed, businesses runs the risk of having to pay VAT themselves than being able to collect it from customers, which will inevitably hit profits.
“So businesses will have to look at all of their contractual terms, including current contracts that run on until after January 1 and contracts signed now with delivery dates after January 1,” Conn added.
However, the issue of increasing price or absorbing VAT will be a major concern for companies selling small value items.
“Consider a product is sold for AED1 now but the company can’t simple increase it by 5 percent to AED1.05. Hence, it has to either absorb the cost and maintain the same price, or round it up on the higher side that will lead to a substantial price increase” he said.
Conn said companies are likely to face cash flow issues post VAT is implemented since the government is yet to clarify on duration of the tax refund process.
As has happened in almost every other country when a percentage based consumption tax has been implemented the lead in period saw dramatic price rises in goods to confront the costs of implementation. Then upon the rule taking effect many businesses if not all immediately passed the percentage on at a minimum and in most cases as per this article by rounding to the upside all to the consumer. The net result was the cost of goods going up multiples of the originally intended taxation rate. Dubai / UAE will be no different. There has been no word of anti gouging laws to accompany the tax rules. From a business perspective this has not been implemented well at all and alarmingly not a word on the collection periods!
To my practice, VAT is refundable when the goods sold in local market are exported. As UAE is a tourist hub, visitors that shop in UAE markets must be refunded at airport exit. So what is refund procedure and how long it take? Re-export goods will be sold with VAT or no? Thank you