The prospects of a federal corporate tax and value added tax (‘VAT’) regime is gaining momentum in UAE. The launch of the new VAT system will not only just affect consumers, but also will have a wider impact on businesses. While it’s still early for companies to make major alterations to their business structures and operating manner, there are manifold matters that need to be considered for settling and amending to make an effective transition from a tax-free environment into the new tax environment.
Primarily, what is the rate of VAT in UAE and how will it affect consumers..?
The Government has decided to charge 5% VAT in UAE, while exempting basic food items and certain services (medical and education etc.). VAT is supposed to be borne by the customers but the businesses are responsible for charging and collecting it. It’s fortunate that the incidence of tax is very minimal as compared to all the other countries. Further, companies need to evaluate the price elasticity for their products for example, in case of luxury items (watches or cars etc.) and need to adjust their margins accordingly. The economist forecast a one-time increase in the inflation rate of 1% to 2% for the region.
Certain Things to be Considered by Business…
Business should scrutinize various aspects covering the financial structure and systems to estimate their overall tax readiness. Besides, they should ensure to review the overall structure of organization to enact cross-charges, appraise contracts to review its present tax clauses, and ultimately reviewing the affect that tax will have on their operations and supply chain. It is recommended that Business should keep themselves updated on tax developments and incorporate VAT in their business plans accordingly. Special care should be given for carrying out effective internal communication and attentiveness with regards to the newer trends in tax, as the introduction of VAT will also influence all areas of the company such as its legal, finance, IT departments and as well as the business strategies.
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How Should Businesses Prepare for VAT Implementation?
There are several measures that companies must address and evaluate in order to make a smooth transition to the tax environment, which is discussed below.
1. Identifying Personnel
- Creating awareness among senior people from the head office, representatives from tax, logistics, accounts and IT and forming an implementation team within the organization.
- Carry out training for staff members for VAT (Using experienced consultants etc.)
- Restructure your business to involve new talent who has the ability to multi-task.
- Hire professional CA firms who could do the groundwork for your business for effective implementation.
2. Impact Analysis
- Identify the effect of tax on profits, supply chain, Information technology, legal and other areas.
- Assess pricing of the products/ quote for contracts, top line, and bottom-line impact
- Derive specific business aspects and business plan.
- Review all legal agreements/ contracts related to supplies of goods and services, and include clauses to accommodate VAT.
- Reach specific implementation plan.
3.Identifying critical issues
- Identify critical issues for prioritization.
- Identify contracts that need a VAT action.
- Identify inter-company transactions and implications of VAT.
4. Implementation
- Businesses will now need to develop more efficient processes.
- Make the needed changes to IT systems.
- Implement pricing changes and also evaluating the cost of products/ services correctly.
- Negotiations with new and existing vendors for reduced prices.
- Communicate efficiently with existing vendors and customers.
- Get professional help for right ways to implement systems perfectly.
- Incorporate a robust accounting system that has VAT module.
Also Read : VAT DESIGN AND ROLLOUT – Series 2
5. Trainings
Take initiative to provide training for operational Staff.
6.Post Implementation
- Maintain accurate financial records in an orderly manner.
- VAT registrations in UAE
- collection, payments and returns need to be performed without lag.
- Resolve transition related issues.
VAT can add an extra cost to businesses if a business is not prepared. Moreover, non-compliance with the tax laws may attract severe penalties. With no doubt, we can say that the implementation of VAT would require a total revamp of all the present practices and would assert a higher degree of financial transparency as well as accounting discipline.
