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How companies can navigate the GCC-wide VAT framework

Naveen Sharma/Dubai
Filed on December 4, 2017

(Alamy Stock Photo)

VAT's implementation and execution is still under the scanner.

The recent announcement to implement VAT has undoubtedly called for a complete scrutiny and overhaul across the GCC. While the taxation itself is not a cause for concern owing to its low rate, its implementation and execution is still under the scanner.

Most firms operating in the region will have to redesign their core operational process to incorporate the tax. With the Federal Tax Authority publishing the draft Executive Regulation with reference to the implementation of the tax said, the firms are hard pressed to adhere to the deadline issued.

Systems overhaul

VAT is not only related to the finance department but also has considerable effect on other departments such as IT, human resources and legal. Since the tax affects all the levels of production, it will have an impact on vendor management as well. In preparation of the inclusion of VAT, a firm will be better served if its processes are in line with VAT requirements. Revising enterprise resource planning (ERP) will aid in the seamless inclusion of VAT into the business mechanism.

Compliance is key

There are three slabs for the VAT tax reform - zero per cent, five per cent and exempted. Regardless of the category you fall in, each firm is required to register with the system by the second phase to ensure compliance with the law. After registering with the authorities, each firm will be issued a unique VAT taxpayer identification number (TIN) that will be used in all further transactions of the firm and will be essential to file returns. Ensure that your invoices henceforth feature this number prominently for effortless tracking of operations. A "live" phase is expected to start from January 1, 2018, where firms can test whether their business systems are compliant with the prescribed procedures.

Training for VAT

The implementation of VAT is a new phenomenon for many firms in the Middle East who have enjoyed a tax-free existence so far. In doing so, both their people and processes are grossly under-prepared. While the processes can be easily modified to include the new component, the people will require a thorough introduction to ensure no manual error disrupts the adoption of the taxation system. Since it is not limited to the finance department only, all personnel in the firm must be educated about the same. It is a good idea to employ the services of an expert to help them with the training and possibly guide them through the initial period of acclimatisation.

Get your books in order

The companies should clean their master data of suppliers, customers and inventory to avoid duplicating of records. Both the cash flow accounting and bookkeeping practices will have to be updated to provide the correct accounting picture that will aid in the computation of the tax amount. Consulting VAT experts to do a complete VAT impact study will be essential in both compliance and minimising of the tax legally. Firms can also employ accounting softwares that take into account both VAT owed and VAT to be paid. Since VAT regulation stipulates a regular filing of returns every quarter, firms must reform their prevalent practice of closing books on a yearly basis. The bookkeeping system under VAT requires the firms to maintain their records and book of accounts for the next five years. In addition to this, additional information such as ledger, purchase day books and invoices may be required for further verification.

Account for the cost

Although the VAT tax rate is at a meagre five per cent, its implementation will have an effect on the cost of doing business for most firms and will adversely affect prices as well. We must understand that since all stages of production come under the tax umbrella, even the prices that vendors charge the firm will be affected. Planning and accounting for the rise in cost at various levels in the organisation should form the basis of all future operational decisions, particularly in IT, supply chain management and human resources.
VAT is an unknown entity to most firms in the region and has been a cause of much debate and anticipation. However, with strong fundamentals and thorough knowledge, a firm will be able to easily implement and adapt to this reform.

The writer is chairman of ICAI Dubai Chapter. Views expressed are his own and do not reflect the newspaper's policy.

 


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