With a view of giving birth to a new source of income, the United Arab Emirates (UAE) has taken a decision to implement VAT with a rate of 5%, that saw the light of day on 1st Jan 2018. Although, this initiative is taken with the aim of boosting the Emirates economy, the same has turned itself as one of the biggest challenges for business owners who deal with the restaurant business. If you are a business investor or an entrepreneur who wants to set up a restaurant business in UAE, you need to be aware of certain essentials. Do read below to know what VAT is all about and its impact of VAT on restaurants.
What Is VAT?
VAT refers to Value Added Tax, which is a consumption tax that needs to be borne at every step of consuming a product or service. It is an indirect form of tax and is levied on more than 180 countries. To join the twine, the UAE also came forward to implement the same in the daily business transactions revolving in the Emirati economy.
VAT in UAE | 2018
UAE VAT Law has been passed that mandates the business entities to implement VAT charges on the goods or services delivered. The main idea behind the implementation of VAT is to increase the number of sources of revenue flow, bring a stable position for SME’s, and to make every dirham count.
Input Credit on VAT for a Restaurant in the UAE
A business needs to undergo VAT registration if its sale of goods and services exceeds AED 375,000. In case of the restaurant business, a collation of aggregate receipts amounting to AED 1,000 or above per day would require the entity to register with the Federal Tax Authority (FTA). VAT for a restaurant will be charged in the following stop-points:
- Purchase for food items
- Materials used for packing
- Rent of the restaurant
- Delivery vehicles
- Furniture and fixtures
- Kitchen equipment
- Office equipment
Since a VAT is charged on every step of the manufacturing process, the same is to be borne by its customers. Now, the question is…
How Does a Restaurant Implement VAT?
To implement VAT charges, a restaurant has got 2 options:
- Revise the menu price by adding the VAT charges.
- Display a footnote stating that a 5% VAT will be charged on the final bill amount on every page of the menu
Now, let’s move one step ahead and look into the effects of VAT on restaurants.
Effects of VAT on a Restaurant in the UAE
Talking about the effects of VAT on a restaurant, we can see the following changes:
- The difference in the consumers spending pattern as the price gets increased
- Restaurants importing raw materials and ingredients need to pay VAT, as a result, a change can be seen in the B2B business chain
- Investments to be made in installing VAT software to maintain the proper records
- Restaurants that never maintained proper records now needs to maintain one
- SMEs with an annual turnover of AED 3,75,000 come under VAT regulation
In case of non-compliance, tax penalties will be issued by the FTA, which lowers the goodwill of one’s business. So, to be on a safer side, it is best to implement the VAT charges on one’s restaurant business. To initiate the process, it is advisable to take the experts opinion while dealing with the implementation process, as it involves legal proceedings that are to be followed. JAXA is one of the leading tax consultants in the UAE and can help you in implementing VAT for your restaurant business. Our team of experts can guide you at every step and get the process implied in a hassle-free way. To take a step forward, do contact us today – we’d be glad to assist.