The UAE will implement VAT at the rate of five percent in January 2018. This is not breaking news but still many people are concerned as to how the VAT will affect them personally. The VAT will affect every individual and every institution in the UAE in some way.
The easy way to understand a Value Added Tax is to consider it to be a “consumption” tax. Put simply, for most goods and services, every time somebody sells a good or service to a customer, regardless of where they are in the supply chain, 5% will be added to the price which is collected by the seller and remitted to the governments tax department.
VAT is not a new phenomenon. It has been implemented in many economies around the world and is considered an efficient and equitable way for governments to collect tax revenue. As oil prices have declined significantly, oil dependent economies require new sources of revenue to continue to invest, innovate, develop infrastructure and provide services that are required for sustainable economic growth. The IMF has predicted that the USE may improve GDP by as much as 1.5% by implementing a 5% VAT. Some countries have applied 20% VAT’s to generate the revenues required by their governments.
For businesses, there are procedural and systems that need to be implemented to ensure that compliance with is achieved in the most resource efficient way possible. Usually, this requires the implementation of an appropriate accounting solution package. Non-compliance could be expensive, with heavy penalties expected to be imposed for those businesses who do not comply.
Those businesses who are unsure of how the VAT works or will affect them, need to seek expert legal advice as to their obligations under the VAT regulations and engage accounting experts to ensure their systems and procedures are correctly recognising, applying, recording and remitting VAT.
Individuals, meanwhile, will be impacted in their everyday life. For example, Electricity and water services will be subject to VAT, so will most of the food that you buy and the purchase of that new car and any subsequent maintenance that it will require and private education will also attract the VAT.
Fittings and furniture for your new home will also attract VAT, as will services such as housekeeping, dry cleaning or laundering.
There are some goods and services that will be VAT exempt. Items such as fuel for your car, essential healthcare items, public education, air travel and taxis. It is important that, when a VAT is being applied, that the poorer segments of the population are not disadvantaged by taxing the necessities of life.
Technically, the VAT will not apply to your rental expense however landlords will be subject to VAT on items such service charges and maintenance, indirectly driving up the cost of rentals over time.
If you decide to purchase a new home, there will not be VAT applied directly to the purchase but it will be applied to the real estate agents’ fees. Of course, as a purchaser of a new home, your purchase price will certainly cover for the VAT that has already been paid on the charges for materials, labor, marketing and other services etc. that the developer had to incur to bring the project to market.
If you are selling your current house in the secondary market, the sale itself will be exempt from VAT, however, you will need to pay VAT on any Real Estate Agents fees, marketing fees, and maintenance or staging fees that you might incur.
For developers, VAT will affect virtually every supply and construction contract that exists. This will have an inflationary effect on the industry as the additional cost burden of the VAT will be passed on to the consumer. Developers need to ensure that they have the systems to recover the VAT cost and ensure that future planning considers the inflationary effect so that any possible drop in demand due to the rise in prices is comprehended with minimal effect on margins.
VAT is not something to be feared, but it is something to be understood, particularly by the business community. The only cost to business is the administration required and the expense of ensuring compliance while the consumer will only notice the effects at the cash register.