VAT in the UAE: Who will feel the biggest pinch?

With the implementation of value added tax (VAT) in early 2018 in the UAE now a certainty, there is growing apprehension in the market – from businesses and consumers alike – about how the new regime will impact them.

Details about the tax are yet to be disclosed, but officials have confirmed that it will be charged at 5 per cent with around 100 items set to be exempt. These are anticipated to include essentials such as food, education and healthcare.

Who will be hit hardest?

“VAT is not a tax on sales; it’s a tax on consumption and it sticks with the final consumer,” according to Martin Dane, associate director of VAT and indirect tax – UK at the audit and accountancy firm RSM.

But with the exempt items expected to include housing rent – the overall effect on cost of living may not be a straight 5 per cent; it may be less than that, opines Rakesh Pardasani, partner at RSM.

“At a modest rate of 5 per cent and with certain exemptions, I don’t think VAT will price out people,” he says.

“In some time it will become a part and parcel of living in Dubai.”

The impact on consumers will be mainly psychological, as they will see “tax” for the first time, adds David Stevens, partner, MENA VAT implementation at EY.

“The overall impact on them though of around 2.5 per cent CPI is less than the usual annual inflation rate anyway, and may be less, given the current competitive market conditions.”

So will businesses feel the brunt of the new tax?

Considering that the tax is passed on through the supply chain until it finally reaches the consumer, most businesses can maintain tax neutrality and in fact become tax collectors for the government, according to Dane.

But experts acknowledge that there is going to be a cost of compliance for completing VAT returns – for keeping books of accounts and making sure that VAT credit is collected properly.

Saulius Adomaitis, partner of performance improvement advisory services at EY says: “As VAT will affect most transactions, businesses will need to make sure that each and every single invoice they get or issue is compliant, or they will not be able to claim VAT back.

“This will require changing or upgrading their IT systems and training their employees and suppliers. If planned properly, such a transition may take 12-18 months.”

Therefore, the biggest impact of VAT will be on businesses, claims Stevens.

“Businesses will have to come to terms with the strictures of doing business under a VAT compliance regime,” he says.

Will it discourage SMEs in the market?

Officials have revealed that under phase one, only companies which record annual revenues of more than Dhs3.75m will be obliged to register under the system and will be taxed accordingly.

Companies that make annual revenues of between Dhs1.87m and Dhs3.75m will be given the option to either register under the first phase or wait until phase two.

This means the introduction of VAT will not discourage SMEs, as many will not be part of the system initially, according to Stevens.

“It is adopted throughout much of the world without any such implications,” he says.

“It will however, add to their costs if they are registered, as they will also be subject to the rules and compliance requirements facing other businesses.”

However, Parasani suggests small businesses that don’t register could be at a disadvantage.

“If they do not register, it may be a disadvantage for them because they may still have to pay on the inputs that they procure from the market which they cannot pass on to the end consumer.

“So yes, at the end their product may be 5 per cent cheaper than a bigger organisation but in terms of the process, they may lose out on some VAT credit. So that will ultimately add up at least some percentage to their cost,” he claims.

“They will have to voluntarily consider whether they want to register even though they are below the threshold limit,” he adds.

Preparation is key

Experts acknowledge that the biggest need of the hour is for businesses to start preparing for the tax.

Firms must begin creating awareness and increasing knowledge about VAT throughout their organisation. This includes assessing the potential effects of the new tax on their business, its impact on margins and cash flow, according to PwC.

“Companies should take action now, if they have not already, to prepare for the implementation of the new tax systems and be ready by the go-live date,” says Jeanine Daou, Middle East indirect taxes leader at the firm.

While talent is a problem at present, VAT- accredited personnel have started coming into the UAE, adds Pardasani.

“But preparation is the key – businesses and even SMEs have to ensure that they start getting into the discipline of keeping books of accounts. Maintaining proper records is essential because all that documentation is key in claiming VAT and avoiding any penalties that may come because of non-compliance,” he warns.