Implementation of VAT is the part of the aggressive tax implementation regime undertaken by the Government of UAE. This decision was taken by the GCC, i.e., Gulf Cooperative Council in order to boost the economy, improve infrastructure and provide state of the art facilities to the residents. A VAT is an abbreviation for Value Added Tax, is the most transparent form of taxation and is accepted in more than 150 nations worldwide. The reasons for its popularity date to the end of World War 1 when the economically smeared Germany came up with this policy of generating emoluments. This pattern encourages taxation on every step of production which is ultimate to be borne by the end consumer.
Why the VAT is Implemented in Dubai
In Dubai, VAT was duly implemented with the dawn of the New Year on 1st January 2018. Its implications affect business enterprises, the residents, and the 7 million expats. The government has resorted to such measures of generating additional income owing to the fact that, the economy of the state solely runs on exports of Natural Gas, Oil and Hydrocarbons. And now when, the rates of these amenities kept fluctuating, the economy was appearing to take a hit.
Hence, with tact and pre-arrangements, the government successfully administered it upon its citizens. However, it has taken due care that such schemes should not discourage business enthusiasts, hamper service rates, and dispirit tourists. Therefore, the government has not made any significant changes in the sectors of basic healthcare services, life insurance policies, education, local public transport services, and also made a provision for a complete refund to the tourists who have paid the VAT for the goods purchased. However, there would be no such refund on the services availed. Still Dubai, UAE makes it to the list of those countries with the least rate of VAT in comparison to other countries such as Denmark, Netherlands, UK, etc.
What Does People of Dubai Think of VAT
The people of Dubai, still feel that the 5% tax imposed on the goods and services will discourage the customers to avail their service and their sales will go down. Some say that it has been imposed without them given enough time for any preparations. And in 2018, it is too early to impose such policies. Though people are uncertain of the long term consequences, this tax, will no doubt, bring transparency and prevent tax evasions on one hand and contribute to a considerable rise of service rates on the other.
UAE is on the Road to Become Best Country in the World by 2021
Business entities will now have to register for VAT if the value of their taxable supplies exceed AED 375,000 over previous 12 Months Period or is expected to exceed that threshold in 30 days. Moreover, Voluntary Registrations are also welcome if supplies and imports are expected to exceed AED 187,500. The total VAT which is to be paid will be recorded as per the difference in output and input VAT for the period under reference.
Khalid Ali Al Bustani, who is the Director-General of the FTA (Federal Tax Authority), the authority which is responsible for regulation of VAT in UAE, has said, “In collaboration with all concerned entities, the Federal Tax Authority set the foundations for a holistic and balanced tax system, making the UAE one of the first countries in the world to implement a fully electronic paperless tax system, our advanced system encourages auto-compliance with procedures, all the while maintaining transparency and accuracy, as directed by the UAE’s wise leadership, which strives to make the UAE one of the best countries in the world by 2021.”
How VAT is effecting Businesses in Dubai
The VAT will affect “virtually all functions” within a business, including information technology, human resources, procurement, finance and marketing. In case it is not applied correctly, it may become an additional cost to the business. Further, non-compliance with tax laws attracts severe penalties. All businesses must undertake a review of their current contracts to determine if VAT has been appropriately addressed. Businesses who are involved in exempting supplies need to evaluate the additional cost on their purchases along with the consideration of their business model which may not be sustainable as a result of the introduction of VAT.
Other than additional administration costs, businesses will be required to focus on how VAT will impact their functioning which includes the financial system, supply chain arrangements, transition periods, operation models, end-customer pricing and other relevant areas. Businesses or organizations especially focus on the above areas.
Businesses and merchants will need to incorporate VAT into their accounting systems and will need to keep accurate records to demonstrate to the tax authority that they have correctly complied with the VAT rules. Here, IT handles such as EPR Softwares will play an important role in this process and in larger organizations wherein a fully automated tax engine will likely be a necessity.
With the realization of this new tax regime, ERP Software has seen increased demand. Offering a one-stop solution to all the issues relating to VAT, the software provides the entity on the go solution for registration, followed by accounting for VAT, tax planning, strategic advising, report preparation, and filing returns to the VAT authorities. The ERP software makes the job easier as it manages Inventory, Sales, CRM, Accounting, E-commerce facilities, marketing and intelligence all at once. So the companies have now started taking up the measures which could fall in line with the implementation approach of the government. So they can rest assured of filing timely returns and avoid unwanted financial or non-financial repercussions.