GCC countries are all set to implement the Value Added Tax (VAT) for the first time starting January 2018. This is one of the greatest milestones in the history of Gulf countries, wherein taxation and specifically VAT is quite new to the region’s business and for residents as well. All stakeholders including businesses, citizens and visitors are gearing up to understand the methodology of this tax structure and the impact it’s going to have on their day to day operations. VAT in UAE as well as in Saudi Arabia is set to roll-out in early 2018.
To create sufficient awareness about this new tax structure, the UAE Chamber of Commerce has been holding a series of workshops for businesses and companies. Added to that, the Ministry of Finance on its part is holding brief discussions to educate financial advisors about the implications of the new tax law.
Any specific reason behind GCC states implementing VAT?
For decades, the key driver of economic growth for gulf countries has been the revenue that has been generating from the oil and gas sector. If we consider the statistics, between 2011 and 2014, the combined revenue from oil and gas accounted for 70-75% of the total government revenues.
As most of the gulf economies are committed to huge capital investments and expenditure, over a period of time, it has become difficult for respective governments to sustain projects with low revenues generating from oil sales. Added to that is the depletion of oil reserves that is pushing these countries to the brink of financial crisis.
As per the IMF projections, if the GCC countries fail to implement these reforms, these countries would be plunging into a fiscal deficit, exceeding $700 billion between 2015 and 2019. In order to bridge this gap, predicted to remain at 6.5% of GDP in 2020, the GCC countries have been forced to judiciously implement tax reforms. The revenues yielding from the implementation of VAT in Dubai is expected to touch AED 12 billion in the first year and up to AED 20 billion during the second year.
What are the areas, which are going to be taxed?
According to the agreement reached between the GCC countries, 5% of VAT shall be levied on water & electricity bills, foods, jewellery, gold and number of other non-essential goods in UAE. However, some items including medicines and tuition fee shall be exempted from tax.
Who shall fall under the tax bracket?
- Businesses with taxable goods or services, having an annual turnover of more than AED 375,000 shall be required by law to register for VAT.
- Businesses with taxable goods and services over AED 187,000 and below AED 375,000 shall have an option to register for VAT.
- All those businesses that offer education and health services shall be able to reclaim VAT value from the government.
- On the other hand, consumers need to pay more for any non-essential items, for instance, if you are buying a TV worth AED 8,000, then, you have to pay AED 400 more.
- A residential buyer and seller doesn’t fall under the ambit of VAT pertaining to any residential property transaction. However, the sale of any commercial property shall attract a standard VAT rate.
- An exporter/importer shall be required to pay VAT at the point of entry for goods that are imported to GCC. However, for goods that are moving outside the GCC destination within a specific time frame, no duties shall be payable.
What are the implications for businesses, who fail to comply with this new law?
If a business fails to keep the required records and any other information as per the new law shall attract a fine as follow:
- AED 10,000 for the first-time offenders.
- AED 50,000 for a repeat offence.
What are the ramifications of implementing VAT in GCC countries?
As per the new study conducted by Oracle and Harvard Business Review (HBR), the implementation of VAT in GCC countries is poised to generate a massive wave of digital transformation. The study, which was based on a poll of 450 senior executives across GCC revealed that about “73% of businesses consider VAT implementation a key opportunity to initiate wider digital transformation projects within their organizations”.
Ensuring compliance with the new law implies that businesses shall have to automate their processes so that every transaction is captured without any defects. With cloud adoption growing at a rapid pace across GCC countries, the advent of the new tax law has hastened the speed at which businesses are adopting the cloud technologies.
According to Arun Khehar, senior vice-president, Oracle Eastern, Central, Europe, Middle East and Africa, “Cloud spending across the META [Middle East, Turkey and Africa] region will reach $715 million in 2018 and VAT compliance is expected to further drive this trend”.
Based on the study related to current VAT preparedness levels of businesses across GCC countries, the Oracle/HBR found out that about 21% of respondents have set up initiatives to comply with the new law.
However, 30% of respondents stated that they didn’t have enough information on the VAT, while an additional 47% of the respondents revealed that they were awaiting further assistance from the local governments.
However, one of the challenges that businesses might face is managing their business process changes, wherein 68% of respondents perceived this as a major challenge for their businesses to become VAT compliant. Keeping aside the challenge, there is an urgent requirement to modify their business processes, IT systems and scale up their workforce. In the light of the above discussion, GCC countries have to immediately get started by performing a “3600 assessment” across their businesses to evaluate the potential impact and transformation requirements of their business landscapes.
Non-availability of qualified experts
As per a study, 38% of respondents believed GCC didn’t have adequate qualified tax experts to implement the new tax law. There is a huge demand for professionals who can rightly understand and interpret the working of the VAT.
Indian tax professionals, who have successfully implemented one of the most complicated tax regimes – Goods & Services Tax (GST) are most suited for implementing the VAT, following the same implementation methodology and paradigms. This is one of the primary reasons, why VAT in UAE is looking out for bright chartered accountants (CAs) for assistance in interpreting and implementing the new tax regime. Some of the sectors that Indian CAs are poised to work include real estate, oil & gas and retail.
With depleting oil and gas revenues, UAE and other countries are gearing up to implement VAT that provides a useful tool for tax authorities to generate the money that is needed to finance their governments’ projects. Businesses shall charge VAT on sales and not on profits – the standard rate being 5%. And moreover, businesses who fail to comply shall be legally penalized. It is expected that VAT is going to bring about a revolutionary change in the way businesses across GCC countries operate, leading to a rapid digital transformation.
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