VAT on SMEs: In small doses

dubai - Various tax consultants are working to assist companies to welcome the VAT era

UAE businesses are gearing up to adapt to value added tax, or VAT, that will be introduced on January 1, 2018 at a rate of 5 per cent. Various tax consultants are working to assist companies to welcome the VAT era.

VAT will be introduced in the UAE in two phases. In phase one, companies with recorded revenue of more than Dh3.75 million are obliged to register for VAT. Also during phase one, companies with revenue between Dh1.87 million and Dh3.75 million will have the option to register for VAT. In phase two, all companies will have to register for VAT, however the date is still under discussion. This may indicate the manner in which other GCC countries will phase in VAT.

Khaleej Times spoke to some SMEs who said that while the sector is making preparations, several doubts and concerns persist. However, they are looking at the larger good of transparency in business boosting accountability.

Brian Conn, partner at BDO Tax Advisory Services, said: "Many businesses are under-prepared and I believe many underestimate the amount of work that needs to be done. VAT is a tax that affects all parts of the business, including sales, purchases, finance, legal, IT and people. There are also some strategic decisions that need to be made. Dealing with all this, especially the changes to the IT systems, takes time and the clock is ticking.

"There are a number of factors that are making businesses hold back and one of the most often-quoted is the delay in releasing the detailed VAT law. Businesses feel they do not have information to act on. But the basic principles of the tax are well-known. In addition, the recent Ministry of Finance workshops have provided additional information on how the tax will be applied. If businesses do not leave time to prepare, they risk not being able to comply with the law from day one and may find themselves facing problems with suppliers, customers and unnecessary costs."

BDO has advised clients on implementing indirect taxes in a number of countries and advises that it is critical to ensure the effective design of systems to capture and report indirect taxes for compliance.

EY conducted a survey of over 500 participants representing businesses operating in the GCC. When asked how prepared their business was for VAT, 50 per cent said they have not started any preparations, 29 per cent have studied some of the new VAT provisions; six per cent had a workshop with stakeholders; four per cent have conducted an impact study and 11 per cent have considered changes needed to enterprise resource planning system.

Mowaffaq Balish, commercial director Middle East at Caparol Paints, said: "VAT is not a tax on profit, it is a tax on consumption, which means that it is better than an income tax where it will encourage to reduce consumption and encourage saving. VAT will not have a significant impact on the cost of living in the UAE as the sectors of healthcare, education, social services and basic foodstuffs are excluded. The UAE government will manage the additional revenue to provide more services to citizens and to spend on infrastructure projects. Companies will face the challenge of setting the right price for consumers' purchasing power. Not all companies will be able to raise commodity prices by five per cent, especially as consumers respond to price increases not in real time."

A research by BDO indicates that not all suppliers were prepared for the implementation of indirect taxes and a basic level of education was required for businesses to claim the input indirect taxes on purchases.

"VAT will bring in transparency, which will help the financial sector to differentiate between genuine businesses and suitcase operators. Overall, the UAE is marching towards building an economy that will be organised and structured. But, the government must keep the attraction of its economy being tax-free and hassle-free. So, restricting the percentage level to a maximum of five per cent is a very important factor, like they have done for customs duty," said Prakash Bhojwani, president and CEO, Time Machine Group.

- sandhya@khaleejtimes.com