In today’s world, an individual or business entity is concerned a lot about tax payment. Often, we hear the term ‘VAT’, which is levied on our daily essentials. In simple terms, we can say that VAT is an indirect tax levied on the final consumer for the consumption of goods and services being opted by them. More than half of the countries have understood and implemented it at a very fast pace. United Arab Emirates (UAE) is one among them who have recently implemented the VAT process in its national arena. Let’s have a look at how the entire process evolved and is now implemented.
Introduction of VAT
The concept of Value Added Tax (VAT) evolved in the 20th century and was enacted by many European countries by 1960s and 1970s. Moving ahead, the developing nations started adopting the procedure by the 1980s. It is a multi-purpose sales tax that gets paid at the point of purchase. We can illustrate the entire ‘value added’ concept in a simple equation:
Value Added = Value of Output – Value of Input
Today, more than 160 countries are registered under the tax, and the global average tax rate is 12%. VAT also serves as another means of revenue for an economy, and the global average revenue generation from VAT as a part of GDP constitutes 7.5%. Now let’s have a look at the Emirates acceptance of tax.
Introduction of VAT in UAE
The UAE is a part of the GCC countries. The GCC finance ministers confirmed a provision for GCC VAT Framework Agreement by Dec 2015. In Jan 2016, the UAE financial minister confirmed that the VAT framework will get implemented by 2018. The countries entered into an agreement to implement the VAT in its states with an aim to diversify the sources of revenue. GCC VAT implementation is based on a multi-jurisdictional single market regime and finally, the UAE VAT implementation took place on 1st Jan 2018, with a rate of 5%. Certain industries that are exempted from VAT include:
- Social Services
- Basic Foodstuffs
UAE Federal Tax Authority
The UAE Federal Tax Authority is a government entity that was established in the year 2016. The main aim behind establishing this entity was to collect and manage federal taxes, increase the UAE non-oil revenues, smoothen the accounting services in UAE, increase auditing companies in Dubai, and enhance its economic sustainability.
The main objectives of UAE Federal Tax Authority include:
- Delivering a quality service in improvising the management at a global level
- Maximizing the tax revenue within the scope of tax legislation
- Operating efficiently by handling the taxpayer collection and maintain an interaction
- Enhancing the UAE's growth
Impact of VAT on UAE
Now, since VAT services have been implemented by business entities, there are different impacts on the business entities both positive and negative. Let’s have a glance at both the sides.
- New revenue stream to the UAE government
- The improved infrastructure of the nation
- Non-financial benefits like reducing the rate of civil fraud, corruption, waste, etc.
- Business efficiency gets multiplied
- Costs occurred by business entities gets distributed via sales channels
- Opens market for advisory firms specialized in VAT terms
- Extra costs get incurred since additional functions are to be performed by business entities
- The need to change a business structure arises if there exist more than one business entity handling the same product, to become cost-effective
- VAT records are to be made available for a minimum period of 5 years, hence business are required to update them on a regular basis to be accountable to the tax authorities
Phases of VAT implementation
Dealing with VAT is a complex task. Organizing the VAT work-streams is extremely important that involves assessment, service design and implementation, technical analysis, change management, etc. VAT implementation includes a few phases that need to be met by an organization to carry out VAT services. These are:
Phase 1: VAT Impact Assessment
The revenue part is to be drafted and taken care of excluding any new operational cost to the business.
Phase 2: Planning and Implementation
VAT process design is initiated along with new supply chain structures, VAT training materials for the internal management, build IT projects to deliver tax-technical results.
Phase 3: Transition and Output Testing
Sample testing is done on the projects built, review it from VAT perspective and develop trial run-generated VAT report, highlight on the issues found.
Phase 4: Post-Implementation Assistance
Review and cross-check on the effectiveness of supply-chain management and sample transactions, highlight the potential areas in terms of VAT compliance.
VAT Services in UAE
VAT refers to Value Added Service. It is a service charged on the goods consumed. The UAE has got implemented the VAT system from 1st Jan 2018 with a VAT rate of 5%. The business entities are expected to file VAT using the online Federal Tax Authority (FTA) portal.
VAT Filing Period for Business Firms
Every business needs to undergo a tax period in which the tax payable needs to be calculated and collected. The standard tax period is:
- For businesses with an annual turnover below AED 150 million – quarterly basis
- For businesses with an annual turnover above AED 150 million – monthly basis
VAT 201 and Filing Procedure
The name for VAT Return Form is ‘VAT 201’. This has been divided into different sections:
- Taxable Person Details
- VAT Return Period
- VAT on sales and all other outputs
- VAT on expenses and all other outputs
- Net VAT Due
- Additional reporting requirements
- Declaration and Authorized Signatory
In order to access VAT 201, one needs to log in FTA E-services using their username and password. The non-filing or incorrect filing could in paying penalties ranging from AED 1,000-3,000.
Impact of VAT on Business
The implementation of VAT has brought about a fundamental business transformation. It will have a massive impact on all the business segments ranging from procurement to sales, which would affect the value chain of an organization. This would have a corresponding impact on the following business areas:
- Complex calculations would arise while planning strategic decisions pertaining to business structure
- Dealing with the internal and external stakeholders would be a bit difficult
- Financial challenges would come across that involves tax credits, cash flow management, refunds and accounting periods
- Chance of instability regarding demand and supply of goods and services, contracts, etc.
- Changes in the general policies of the organization that needs to meet the VAT declarations, tax authority audits, etc.
- Heavy investment is required to upgrade the technology to make it VAT-savvy
As you have seen the impact of VAT on business, you can make infer as to why this concept is accepted at an international level. If you are an entrepreneur and planning to start your business in any of the Emirates, it will be mandated for your business to opt for VAT Services. Wondering how to initiate? Well, here’s your solution.
JAXA has been a business consultant helping business entities in dealing with their accounting and taxation services at a global level. We have helped business entities to frame and meet their VAT requirements. Our business experts will help you in understanding the international vat structure, deal with the changes that occur due to VAT implementation and make them easier. Few of our VAT services are:
- VAT registration and VAT Group registration
- VAT compliance and control
- Filing and payment
- Data recording and management
- Supplier management
- Customer management
Thus, you have seen how important a role VAT plays when it comes to dealing with business firms. Avoidance or negligence in the implementation of VAT services could result in payment of a penalty of AED 20,000. So, don’t let your business fall into the penalty pit and avail the best benefits. To implement the VAT services in your business, do contact us today. We’d be happy to assist.