Ministry of Finance in UAE has decided that from January 1, 2018, value added Tax will be implemented across the UAE on the consumption of goods and services. It is assumed that VAT will be charged at the standard rate of 5% on all goods and services. Health, education, basic food items will be exempted from the tax. The new tax system will not only be implemented on UAE but also across the GCC countries at the different rates and at the different application dates.
From the introduction of Value- added tax system will not impact only end consumers but also impact businesses in UAE. From the VAT system in UAE several businesses are facing challenges in implementing the taxation system. Apart from focusing on additional administration costs, businesses or companies will be required to focus on how VAT will impact their operating models which include the financial system, supply chain arrangements, transition periods, operation models, end customer pricing and other relevant areas. Businesses or organizations especially focus on above areas.
Finbarr Sexton, indirect tax leader for the Middle East and North Africa at Ernst & Young (EY), says that, “VAT will be implemented at each stage of the supply chain on goods and services and the cost will be incurred by end- consumer”. From the implementation of VAT in UAE will affect all- functions of business which includes technology, procurement, finance, marketing and human resources.
Analyzing the impact of VAT at each stage of supply chain along with relation to transactions, whether that may be inter- company or external services.
The consumer comes in the end at the each stage of supply chain and the tax fully incurred by the end consumer. So it’s essential that how much tax would be incurred by the end- consumer at the time of consumption of goods and services.
If value-added tax system will not implement correctly, it may become an extra cost for the business. Additionally, extra penalties would be charged by the government when taxes not submitted timely. All businesses in UAE must reassess their current contracts to regulate if VAT has been appropriately implemented or not.
According to Alp Eke, senior economist at the National Bank of Abu Dhabi, said that, “From the introduction of VAT, UAE economy is expected to grow $440 billion in 2019, contribution would be approximately $6.5 billion,
A recent survey done by Deloitte found that 69 percent of GCC businesses were afraid with not being ready for VAT from January.
Justin Whitehouse, Deloitte Middle East indirect tax expert said that “they were aware of the VAT introduced in the GCC, half of the respondents said that VAT will be introduced in the upcoming future.”
According to a tax consultant, “Companies or business enterprises operating their business in UAE is likely to face cash flow issue after the implementation of value-added tax (VAT)”.
How can the implementation of VAT in UAE affect cash flow?
Cash flow is one of the issues that can be faced by Small and medium enterprises (SME) in UAE Cash flow is one the items often unnoticed in the implementation of VAT in UAE, with no clarifications how long the refund process will take. If you are operating the business in UAE how does the cash flow work, you can say that VAT does not affect my business, but at one point either you are owing a lot of money to the government or you might be waiting for the refunds.
As per the information sources, it is clear that UAE will start collecting VAT at the standard rate of 5 per cent from January 1, 2018. Basic food items, health, education will be tax exempted.
According to International Monetary Fund (IMF), VAT at the standard rate of 5 per cent would help to generate more revenue equivalent to about 1.5 percent of the UAE’s gross domestic product.