With the implementation of Value Added Tax (VAT) @ 5% from 1st January 2018 in the UAE, there is growing apprehension in the market for businesses and consumers that how the new regime will impact them.
Consumers
As VAT is not a tax on sales, it’s a tax on consumption resulting final burden on end consumers. Though a major expense in the UAE is house rental which will be exempted from VAT, thus the overall cost of living may not be increased straight 5%.
Overall impact on consumers or residents may be around 2.5% which is surely less than usual annual inflation rate in current competitive market conditions. In some time it will become a part and parcel of living in the UAE.
Impact on consumers will be mainly psychological as we will see Tax for the first time in the UAE.
Businesses
As the VAT is passed on through the supply chain till it reaches the consumers, most of businesses can maintain tax neutrality and practically they will become tax collectors for the government. Though businesses may get indirect hit in business/ sales numbers due to less consumption on account of increase in pricing if full burden of tax passes on to consumers
As VAT will affect most of the transactions, businesses need to make sure that each and every single invoice they received or issue is VAT compliant with all required information on invoice as per the VAT law or they may not be able to claim input credit/ refund of VAT.
This will require change or upgrade in IT system, training of employees, suppliers and customers resulting onetime cost of compliances for businesses for book keeping, VAT Accounting, VAT collection and payment and VAT returns etc.
Businesses will have to restructure the way of doing business under a VAT compliance regime therefore the biggest impact of VAT will be on businesses.
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