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The UAE minister was speaking in Dubai on 24 February after a joint press conference with Christine Lagarde, Managing Director of the International Monetary Fund (IMF) that VAT is expected to be introduced at a rate of 5% on 1 January 2018, with some limited exceptions including basic food items, healthcare and education.
But what is VAT? How does it affect the common man? I attempt to answer some of the most commonly asked questions below:-
What is VAT?
Value Added Tax (or VAT) is an indirect tax. Occasionally you might also see it referred to as a type of general consumption tax. In a country which has a VAT, it is imposed on most supplies of goods and services that are bought and sold.
VAT is one of the most common types of consumption tax found around the world. Over 150 countries have implemented VAT (or its equivalent, Goods and Services Tax), including all 29 European Union (EU) members, Canada, New Zealand, Australia, Singapore and Malaysia.
VAT is charged at each step of the ‘supply chain’. Ultimate consumers generally bear the VAT cost while Businesses collect and account for the tax, in a way acting as a tax collector on behalf of the government.
The UAE Federal and Emirate governments provide citizens and residents with many different public services – including hospitals, roads, public schools, parks, waste control, and police services. These services are paid for from the government budgets. VAT will provide country with a new source of income which will contribute to the continued provision of high quality public services into the future. It will also help government move towards its vision of reducing dependence on oil and other hydrocarbons as a source of revenue.
What will be taxed?
Electronics, smart phones, cars, jewellery, watches, eating out, and entertainment will fall under the taxed category.
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. That means your grocery, hospital or school bills will most likely remain unchanged, unless there are price hikes.
A new law, however, has yet to be released to specify which items are non-taxable. 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.
Will buying electronics, clothes, home furnishings and other non-essentials, expect to pay more once VAT is implemented?
Yes. Since VAT is going to be levied on non-essentials, expect to pay a tax when buying electronic items, home appliances and other big-ticket goods. If you want to own a brand-new mobile phone that costs Dh2,600, for instance, prepare to pay an extra Dh130.
Yes, tourists are a significant source of revenue for the UAE and will pay VAT at the point of sale.
Will all businesses need to register with the government for VAT?
No, not all businesses will need to register for VAT. In simple terms, only businesses that meet a certain minimum annual turnover requirement will have to register for VAT. That is, many small businesses will not need to register for VAT. This decision has been made to safeguard small businesses from the extensive documentation and reporting that a system like VAT requires. Also, businesses may not need to register with the government if they only provide goods and services which are not subject to VAT.
Please note that specific conditions (such as minimum annual turnover) not yet finalised, that will help identify businesses that do not need to register for VAT.
When will registration for VAT begin?
If the initial date for the VAT roll-out is followed, businesses can probably start registering for VAT from 1st October 2017. As announced recently, the registration will be open three months before the go-live date. Companies will have the option to register online.
How often are companies required to file VAT returns?
Registered businesses will be expected to submit VAT returns on a regular basis. For most businesses, VAT returns should be filed every three months. Filing of returns can also be done online using the government’s eServices.
Challenges face by UAE companies in implantation of VAT
Since the VAT rate is only 5 per cent, initially the consumers may not even notice it and may confuse the increase with inflation (presuming the price increases are passed on to consumers rather than being absorbed by companies). However, as the VAT rate goes up over time (the average VAT rate in the world is around 15 per cent), Consumers might resist this by deferring a purchase, whether it be a house or a fridge.
Finally, what does it mean for the consultants that help companies set up the VAT systems and enable them to be VAT-compliant? Given the complexity associated with administering VAT, businesses will have to engage these consultants. VAT opens up a huge new line of business opportunity for consultants. Already the big four have a dedicated VAT division to help companies. It is certainly party time for them.
Who should worry most about VAT in UAE ??
While VAT is an indirect tax applied at every stage of the supply chain, the end effect of the levy is on consumers who finally pay the tax while buying a good or service. There are four important stakeholders in this VAT episode – governments (beneficiary), businesses (tax collectors), consumers (taxpayers) and consultants (VAT experts). So the question is who will be affected the most?
First, let us look at the government that will receive this VAT. Obviously being a beneficiary means that it need not worry about VAT. In fact it should be celebrating. However, as tax administrator, it may have to worry to see that it collects all the VAT that is collectible. It needs to create the necessary infrastructure and manpower to supervise and collect the VAT.
Second, consider the businesses that are supposed to collect the VAT and deposit it with the government. They should be the most worried since they will be the ones that have to perform an extra function, which could result in additional hiring and costs, although they do not receive a direct economic incentive. If it is a question of simply collecting and remitting, then it may not be a big issue.
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