DUBAI, UAE – On January 1, 2018, value-added tax (VAT) came into effect for the first time in the UAE. Naturally, small businesses are concerned about the financial and operational impacts of VAT compliance, especially since they’re used to operating in a low-tax business environment.
While there will be implications for systems, infrastructure, skills and training, there are a number of benefits of the new tax system on businesses and the economy.
What is VAT?
VAT is a tax on the consumption of goods and services and has been set at 5 per cent across the GCC countries. This rate is among the lowest in the world, with some countries charging VAT of more than 20 per cent.
VAT is levied at each stage of the supply chain, from the manufacturer, to the wholesaler, to the retailer, taxing the ‘value added’ by businesses at each point in the chain. For example, raw cotton becomes more valuable as it moves along the supply chain to eventually be manufactured into a T-shirt, or the end-product.
Certain sectors will be exempt from paying VAT, such as healthcare, education, certain foods, some type of real estate transactions and local transport, but these may differ between member countries. Export of goods outside the GCC will be zero-rated, which means exporters can claim a tax refund.
How will VAT affect my business?
If your business has an annual turnover of Dh375,000 (or the equivalent in other GCC states), you will be obliged to register as a VAT vendor. If you generate 50 per cent of this threshold, you can voluntarily register for VAT, which has its own advantages and disadvantages.
The important thing to note is that VAT is not a business expense but a cost that is ultimately passed on to the end-consumer when they buy a product. Businesses act as the ‘collection agents’, collecting the tax on behalf of the government. In this way, they are helping to make the economy more prosperous and efficient.
However, there will likely be indirect costs associated with becoming compliant, which will affect many areas of your business, including pricing, cashflow, financial reporting, tax accounting, supply chain and compliance processes.
The cost of non-compliance could be even greater. Penalties are set at a minimum of Dh500 up to five times the amount of VAT that would have been payable for the period in question. At 5 per cent VAT, this puts your maximum risk at 25 per cent of turnover.
When will VAT come into effect?
VAT, at the rate of 5%, shall be introduced in the UAE and other GCC countries from 1 January 2018. Businesses can start registering for VAT three months before the launch date (1 October 2017).
What shall be taxed?
VAT would be applicable to non-essential consumer goods. Anything apart from basic food and essential commodities would fall in this taxable bracket. This would include automobiles, electronics, jewellery, restaurant services, and entertainment.
What will be exempt from VAT?
The Government of UAE has stated that about items in about 100 categories like food, education, health, bicycle, fuel, transport and social services would be exempted from VAT.
Who shall be taxed?
The FTA on January 10, 2018 announced that 20 free zones in the UAE would be exempt from VAT. These are being referred to as ‘designated zones’. The areas included are largely fenced free zones with special controls on goods, rather than areas such as Dubai Media City or those dealing in financial services.
In addition, goods may be transferred between designated zones without being subject to tax if the goods are not used or altered during the transfer process, and the transfer is undertaken in accordance with the rules for customs suspension per Gulf Cooperation Council (GCC) Common Customs Law.
There is, however, an exception to this VAT exemption in the designated zones: fee charged for services would be VAT-taxed. So, for instance, a business incorporation service availed in a designated zoned would still be levied with VAT. Here is the list of the designated zones:
Ras Al Khaimah
With the introduction of VAT in the UAE, there are considerations that businesses would have to take care of with regard to tax consulting. We at Novasigma have our team of experts to help you with company formation, registration and counselling. For any queries on VAT or tax consultation for companies in the UAE, feel free to reach out to us or read more about Dubai, UAE.
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