What Is VAT? & How does it Work?
Value-added tax (or VAT) is an indirect tax added to a product’s sales price. It represents a tax on the value added to goods or services throughout their production process.
VAT is levied at nearly every stage of the supply chain, from raw materials to the final product sold in stores. Ultimately, consumers end up paying the tax—but businesses are still responsible for collecting it, submitting it to the government, and reporting on how much they collected; along with how much they deducted for their own costs. With that in mind, it’s important to make provision and plan ahead to efficiently integrate this change into your organization’s processes and culture.
How Will VAT Affect GCC Companies?
The vast majority of GCC companies will need to ensure they efficiently and accurately determine and report on VAT requirements by automating these new processes. Businesses that meet a minimum annual turnover will have to register for VAT. But small organizations that turn over less than the minimum requirement won’t need to register. Businesses that distribute goods and services in certain industries, such as healthcare and education, will not need to comply with VAT regulations.
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10 Things you must know about VAT!
VAT will be another source of raising revenues for governments in the Gulf Cooperation Council (GCC).
It is estimated that the UAE will generate more than Dh12 billion additional revenues in the first year after implementation of this new tax.
GCC countries have decided to implement taxation as part of the governments' efforts to diversify revenues in the context of sharp decline in oil prices. The International Monetary Fund has been recommending fiscal consolidation in the GCC through diversification of government revenues and reduction of subsidies.
VAT will be introduced in the UAE, along with other Gulf countries, from the beginning of 2018 at a rate of 5 per cent.
Companies in the UAE that report annual revenues of over Dh3.75 million will be obliged to be registered under the GCC VAT system, the Undersecretary of the UAE Ministry of Finance, Younis Al Khoury, said.
Al Khoury also confirmed that companies whose revenues fall between Dh1.87 million and Dh3.75 million will have the option to register for VAT during the first phase of the VAT implementation. He also mentioned that it will eventually become obligatory for all companies to be registered under the system, when it is rolled out in the second phase, regardless of the reported revenues.
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.
The government is likely to use its ability to either zero-rate or exempt many supplies most likely to impact the common man to ensure that the impact of VAT is kept to a minimum.?Essentially, the intentions of most governments when introducing a VAT is to focus more on taxing discretionary spend by consumers, while ensuring that those at the lower end of the spectrum are protected and assisted.
The UAE government has already announced that 100 food items, health, education, bicycles, and social services would be exempted from VAT.
Electronics, smart phones, cars, jewellery, watches, eating out, and entertainment will fall under the taxed category. GCC countries are also expected to introduce excise duties on certain beverages that are deemed to be harmful to health, including those with high sugar content.
Where you are engaged in the supply of goods or services that are subject to VAT (including at the zero rate) you will be entitled to reclaim VAT you incur on costs. Where you are engaged in activities that are exempt from VAT and you cannot reclaim VAT incurred on costs, VAT will be a cost to your business (as suppliers will charge VAT that you cannot reclaim).
VAT is a tax on consumption and is levied on the price charged to the customer. Therefore it is expected that prices will increase by the amount of VAT. However, it is ultimately a matter for suppliers to determine the price of their goods/services. The price will need to take account of VAT, i.e. whether you charge Dh100 or Dh105, the amount will be deemed to include VAT.
There is a relatively short time to consider the implications of the introduction of VAT and to make the necessary changes. The amount of work required will depend on the size and complexity of your business and it is essential you consider the impact now and determine how best to deal with it.
Governments have been considering the need to diversify income sources and this is even more the case given the developments negatively affecting government revenues in the region such as reduced income from oil revenues.