With the new economic reform of adding value-added tax (VAT) in the Gulf Cooperation Council (GCC) coming into effect in January 2018, many are concerned about its implications. When it comes to taxation, most individuals consider how it will affect their lives and there is often an assumption that tax will reduce purchasing power. Those who have chosen the GCC as a place to live and operate businesses, in-part due to the tax-free environment, are also considering what this means for their future. Overall, there are four broad areas where we can assess the impact VAT will have: impact on the general population, businesses, the job market and government.
Impact on the general population
The primary question being asked by GCC residents is whether the tax applied from January 2018 onwards will increase the price of goods and services? The simple answer is yes. VAT, irrespective of how it is collected and reported, is a tax that has to be paid by final consumers. This will increase the price of goods and services and eventually purchasing power will decrease; assuming that income remains constant. It is also worth mentioning that the applied tax rate is 5 per cent, which is relatively low compared to what is applied in other parts of the world. The impact is, therefore, not expected to be severe but it will still affect purchasing power at a normal consumption level.
VAT is a tax that is unavoidable to the general population, as it is applies to utilities, dining out and many other items that are in daily use. However, governments have also made a list of about 100 essential goods and services that are exempt from tax, such as food items, schools, residential tenants and health care.
Impact on business
If your businesses’ annual revenue is higher than Dh375,000 (more than Dh31,250 per month) you are required to be registered for VAT. Businesses should be registered by the last quarter of 2017 so that they are prepared before the implementation date, since they will have to collect, record and report VAT to the government.
VAT’s structure of implementation is different from a sales tax because each supply chain has to apply, collect and report tax. Businesses have to make changes in operations, technology and human resources to ensure that they fully comply with government requirements. This will involve additional cost of doing business. Governments are running many awareness campaigns to provide basic education on its reporting procedures and standards. To comply, businesses need to change their book reporting standards and have to make sure VAT is collected and reported properly, as failing to do so will result in penalties incurred by the business.
Impact on the job market
New company requirements from the VAT law will create additional demand for a certain skill set. Although businesses will try to curtail this cost by delegating these responsibilities to existing employees (i.e. accountants), tax is a new area which is exposed to heavy penalties in case of errors or incapability to produce sufficient records at the time of submission of tax returns. Businesses are expected to hire VAT experts to take care of this mandatory aspect of reporting. Recently we have seen this trend of more tax-related job opportunities being published in the public domain. Moreover, since tax application varies from country to country, it will take time for each GCC nation to have experts in this area post implementation.
Impact on government
VAT implementation is done by the government, with the purpose of achieving particular targets. In the GCC’s scenario, it is part of the Government’s vision to reduce dependency on oil revenue and create an additional income stream. It is important to note that revenue collected by the government is used for infrastructure developments including the development of roads, parks, waste control and other projects. Increased federal revenue will allow governments to continue funding state of the art infrastructural development within the region.
Considering the impact of VAT on these four major areas provides us with a broad view of what can be generally expected in terms of short-term implications. It will only be possible to accurately determine the impact after VAT’s official implementation in January 2018. What is certain is that companies are required to be prepared for this reform by this date and it is questionable as to how many will have taken the necessary measures.
— Mustafa Hussain, CFA, Member of CFA Society Emirates.