Value Added Tax or VAT for short is a straightforward concept in theory, but when practically applied, it can have a profound effect on a business. In a layman's language, VAT can be defined as a consumption tax which is levied on a product whenever a value is added to it in the supply chain. The Value Added Tax was a recent addition to the tax system in the UAE, and the rate was kept at a nominal 5% which doesn't sound much but can affect a business very profoundly.
Let us understand the basics of Value Added Tax and how will it affect a business.
VAT Registration Criteria
This tax applies to every company in the United Arab Emirates. There are specific criteria that should be followed while a company register's itself for Value Added Tax (VAT). All the businesses which want register for VAT have been separated into three different parts.
1. Compulsory Registration
If the revenue of any business is AED 375,000 or exceeds this number, it has to register itself for filing VAT compulsorily.
2. Voluntary Registration
If the revenue of a company is AED 187,500 or more, in such a case, the company may or may not register itself for VAT. They have no fixed obligation of registering the company, but it is always good to register if an opportunity provides itself.
3. Excused from Registration
If the revenue of a business is south of AED 187,000 in such a case, the company does not require to register for VAT.
Impact of VAT
The application of VAT will not only affect the accounting procedures, but its effect will be seen all across the organization. In the short duration of time, the prices of some of the goods may rise which will affect both the consumers and the businesses, but in the long run, the Value Added Tax will be very beneficial for the economy of the country. When the country starts to get the profits, the companies and the people in the country will also be benefitted.
Some of the long term effects of the Value Added Tax are:
A step towards Reducing reliance on the Oil and Gas sector
The government of the United Arab Emirates has understood that tough the country is rich in oil deposits; it cannot rely solely on the oil and gas sector for its total revenue. With the application of VAT, the government of the country has now a new source of income. This is a constant source of revenue which will allow the government to provides better amenities to the people of the country.
The Value Added Tax is a reasonably new tax, and therefore, its application is not clear to everyone. This situation gives rise to many business opportunities to accountants and auditors. This situation will also help create a business opportunity which attracts Auditing and Accounting firms from all over the world.
Effective and Efficient utilization of resources
As the VAT will be levied on every stage of the development and manufacturing of the product, the companies will be very particular in the use of the various resources. Not wasting the resources and getting the maximum benefit will be the priority of all the companies.
Filing for the Value Added Tax can be a bit complex sometimes. The company needs to present the required documents at the time of filing. This means that a company needs to keep detailed records of all the financial transaction of the company. These transactions will not only help in the VAT filing procedure but will also help in various other functions such as preparation of a budget, estimating the future trend of the industry, Performing an Audit of the company, etc.
Improved Confidence of the Customers
As mentioned above, the company will have to keep records of all the transactions of the company. This means that some companies will have to divulge the data to all its investors. With the financial data in hand, both the present and potential investors can take an informed decision regarding investing in a particular company.
These are some of the ways by which the Value Added Tax will impact the businesses in the United Arab Emirates. Understanding the Value Added Tax can get a bit tricky depending upon the nature of the company. This is why it is always recommended that you should avail the services of a consultancy firm while addressing the VAT related concerns of the company.
If you are looking for a consultancy which provides VAT related services in the UAE, you can look into the services offered by JAXA Chartered Accountants. We at JAXA will understand the working of your company and then provide a customized solution accordingly. For more details on the other services offered by JAXA Chartered Accountants, Contact Us. We will be happy to help you.