On January 1st, 2018, UAE introduced a new form of taxation. This scheme known as Value Added Tax (VAT) is part of the Emirati government’s plan to diversify its income stream and move away from the dependence on oil for revenue. On January 1st, 2018, UAE introduced a new form of taxation. This scheme known as Value Added Tax (VAT) is part of the Emirati government’s plan to diversify its income stream and move away from the dependence on oil for revenue.
Even though the additional expense due to VAT ultimately gets passed on to the end consumer when purchasing products, VAT will affect the way businesses function. Businesses will act as a tax collection agent, collecting tax on their purchases from consumers in order to remit it to the government. VAT will affect several areas of the business such as accounting, pricing, financial planning, and cash flow as well as information technology, human resources, procurement, finance, and marketing. If you are interested in company formation in UAE you need to be aware of the intricacies of VAT legislation.
Who has to register for VAT?
UAE companies should register for VAT if the value of their taxable supplies exceeded AED 375,000 over the previous 12-month period or is expected to exceed that in the next 30 days. You can also register voluntarily if your supplies and imports –or just expenses in the case of startups, including those doing company formation in Dubai – are expected to exceed AED 187,500. These limits apply irrespective of whether you’re a mainland company or a free zone company.
Difference between zero rate and exempt
The standard rate of VAT at 5% is charged on most business products and services. A number of goods and services are either charged a 0% rate or are exempt. Suppliers of zero-rated goods or services can still reclaim VAT they’ve paid on inputs into their business, while suppliers of exempt goods and services don’t have to register for VAT at all, and can’t reclaim any VAT they’ve paid on inputs.
➢ Zero rate servicesThe 0% rate includes exports of goods and services to outside the GCC. The industries that have a zero VAT rate are education, medical equipment, healthcare and the supply of commercial aircraft, buses, trains as well as international transport services (for both passengers and goods), certain investment grade precious metals, newly constructed or converted residential properties, crude oil and natural gas.
➢ Exempt rate serviceResidential buildings, bare land and local public transport services are all included in the exempt rate category, along with some financial services.
Advantages of VAT
VAT does hold several advantages for those planning for company registration in UAE and for the country as a whole.
1. Boost to government coffers:
The new tax is expected to bring a significant new revenue stream to the UAE government. The measure is expected to raise around AED 10bn to AED 12bn in the first year of implementation alone. This revenue will go into creating a more stable economy.
2. Improved infrastructure
VAT will also make it easier and less expensive to do business in the UAE. Investment in infrastructure often has a significant effect on economic development and can cause a rapid growth in the financial standing of businesses.
3. Non-financial benefits
The introduction of taxes, particularly VAT, can play an important role in enhancing government accountability and democracy. Official taxation records result in more informed decision-making, and reduce the chance of civil fraud, corruption and waste.
4. Increased business efficiency
Replacing inefficient, out-of-date accounting systems means many businesses will run far more efficiently. Once VAT-compliant systems are in place for smaller companies will benefit in the long-term from this streamlining exercise.
5. Costs will be dissipated
Consumer is ultimately going be hit the hardest by the new VAT laws. Although the process of collecting and remitting VAT lies with the company, ultimately it will end up being charged to the customer via sales channels.
6. New opportunities
Many companies will look to hire consultants to help them understand the new laws, adapt their business, and set up VAT-compliant systems. It therefore offers a potentially lucrative opportunity for entrepreneurs looking to tap into this sector.
Disadvantages of VAT
In order to comply with the new VAT laws, you’ll need to update IT and internal systems, train your employees in VAT processes, and employ an accounting specialist. It can be expensive, particularly for small businesses.
2. Revising business structure
Purchasing the same raw materials from multiple vendors will be disadvantageous as it will cause VAT to be charged twice. Businesses will need to streamline their procurements to avoid VAT leakage.
3. Being accountable
VAT-registered businesses need to maintain annual accounts, general ledgers, purchase day books, and invoices issued and received, as well as credit and debit notes for a minimum of five years. These records can be audited by the government any time.
4. Uncertainty about the future
VAT rates might rise in the future. Whilst exempt categories are likely to remain exempt, zero-rated products may see an increase. This creates uncertainty for both businesses and consumers, who will naturally be worried about increased costs being passed on to them.
The adoption of VAT might be a hard step for businesses in UAE initially but its initial disadvantages are expected to be tided over by the immense long-term gains that VAT will offer to both the country’s infrastructure as well business operations. Being VAT compliant will allow organisations to be more efficient as well as allow UAE government to make more advanced infrastructure available for businesses.
If you are looking for help for making your business VAT- compliant you will want to talk to an expert in company formation in UAE. Get in touch with Worldwide Formations today and ease the process of company registration.