Dubai: The introduction of a value-added tax (VAT) system in the UAE will not just affect consumers, it will also have a broader impact on businesses as well.
Following the announcement that the UAE will go ahead with VAT, concerns have been raised around the cost of doing business and readiness of merchants for the proposed January 1, 2018 implementation date. Some business owners said they might require more time to get acquainted with the new system or revamp their financial systems and operating structures.
Entrepreneurs must now look at the suppliers for the goods and services they use to run their business, in order to determine the impact of VAT. Whether or not it's necessary to invest in additional manpower to facilitate tax collection is another area to look into.
Nasrullah Chaudhry is a co-founder and CEO of Deutsche Technic Automotive Workshop. He said one of his main concerns is that passing the VAT burden to customers might only discourage people from hiring their services.
“For smaller companies like ours, it will make a deep impact on the numbers. One of the reasons why most expats like myself moved out of the UK was due to the tax. It didn’t allow SMEs [small and medium enterprises] to expand,” he said.
“[Besides] I believe  is way too soon. Companies need to learn the procedures and policies before they can implement tax,” Nasrullah told Gulf News.
According to Finbarr Sexton, indirect tax leader for the Middle East and North Africa at Ernst & Young (EY), VAT will affect “virtually all functions” within a business, including information technology, human resources, procurement, finance and marketing.
“VAT is applied on goods and services at each stage of the supply chain with the ultimate burden, in theory, being borne by the consumer,” Sexton explained.
“If VAT is not applied correctly, it may become an additional cost to the business. Further, non-compliance with tax laws attracts severe penalties. All businesses must undertake a review of their current contracts to determine if VAT has been appropriately addressed.”
“Businesses who are engaged in exempt or partially exempt supplies need to evaluate the additional cost impact on their purchases alongside consideration of their business model/corporate structure which may no longer be sustainable as a result of the introduction of VAT,” he added.
It was announced last week that the UAE will start collecting a five per cent VAT on certain goods and services in 2018. Essential food items will be excluded, and according to estimates by the International Monetary Fund (IMF), a VAT rate of five per cent would generate additional revenue equivalent to about 1.5 per cent of the UAE’s gross domestic product.
Considering that the UAE economy is forecast to grow to $440 billion in 2019, the VAT contribution would be approximately $6.5 billion, according to Alp Eke, senior economist at the National Bank of Abu Dhabi.
While VAT’s economic contribution may be considerable, Eke said one should not underestimate the “complexity” of implementing a new tax system that has never been tried in the Gulf Cooperation Council (GCC) region.
“The mechanics of the system and administration involved are very extensive indeed, and furthermore, it isn’t just done at the government level, but virtually all businesses – from large corporates to SMEs and small family businesses,” Eke told Gulf News.
“[Companies] would need to be educated in terms of how to apply the levy and more importantly, how to account for the VAT and submit the regular reports and filings to the government.”
What business owners need to do
Sexton said “pro-active remedial measures can be taken now to address deficiencies, which should also result in a more cost-effective supply chain.” They will also need to update their cash accounting scheme and record keeping in time for the implementation date.
“Corporate re-organisations and restructures, particularly relevant in the case of exempt businesses, cannot be achieved within a short timeframe and should be analysed immediately. IT system capabilities should be tested. Education of personnel is essential across the business functions,” Sexton added.
Those that operate in other GCC countries have more tasks to undertake, considering that VAT is also being considered as a region-wide system.
“As a GCC VAT system, UAE businesses, which have operations in other GCC member states, must examine the impact of the special rules on intra-GCC supplies and acquisitions and intra-group transactions to ascertain whether the current organisation model will remain effective after the new VAT system is implemented,” said Sexton.
“Businesses and merchants will need to incorporate VAT into their accounting systems and will need to keep accurate records to demonstrate to the tax authority that they have correctly applied the VAT rules. IT systems will form an important part of this process and in larger organisations, a fully automated tax engine will likely be a necessity.”