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The Vat Impact
Dated: 10-01-2018

It’s been a long time coming – but finally Value Added Tax (VAT) has been introduced in the GCC region – with the UAE and soon Saudi pioneering it. While most countries the world over have already inculcated tax into their revenue system, the GCC region was possible the few remaining regions to not have any taxes. VAT is one of the most common types of consumption tax that has been implemented in more than 150 countries around the world. VAT is charged at each step of the 'supply chain'. Final consumers generally bear the VAT cost while businesses collect and account for the tax, in a way acting as a tax collector on behalf of the government.

Starting January 1st, 2018, a new era dawned on the UAE economy where the general public will start sharing the burden of budgetary expenditure. It will be implemented gradually across the GCC in phases over the next year. According to a Gulf News report, while the VAT is expected to contribute Dhs 12 billion to the UAE exchequer, studies show the consumption tax across GCC countries is expected to raise additional revenues between 1.2 to 1.6 per cent of GDP in the first year itself.

The biggest concern around the introduction to tax is its impact on purchasing power and overall cost of living. Government and independent analysts have allayed fears that VAT will result in a sharp increase in cost of living. The impact of VAT on inflation and government revenue will vary depending on the proportion of consumption in the economy and how much of the consumption base is captured by VAT. By including a large number of items consumed by the general public in the zero rated or exempt category, the inflationary impact of the new tax has been largely muted.

While VAT is applied at a uniform rate of 5 per cent on taxable supplies, a number of goods and services are either zero rated or in the exempt category in the UAE, reducing the overall inflationary impact. The fact that the UAE is new to taxation, the VAT implementation has come with its fair share of apprehensions in the minds to all stakeholders. Taxation is a globally accepted practice of augmenting and diversifying government revenues. Persistent low oil prices over the past three years have brought considerable economic pressure on the GCC countries. This had led to an urgent need to diversify revenue streams. For businesses that are integrating VAT into their invoicing, accounting and auditing systems, it is likely to come with some amount of initial hiccups until they get used to the new system. Three companies in the UAE cleaning & hygiene industry talk about how they have adapted VAT into their financing system and the impact it may have on them and their customers:

George Thomas, Vice President, Epsco, offers the perspective of the Cleaning Service Provider

How will the introduction of 5% VAT affect your company and services?

Tax is the major source of revenue for most of the countries world over. Residents of U.A.E have been fortunate to enjoy a tax-free living for a long time. However like most other changes, sudden introduction of a tax will definitely have its effect. Tax may not increase the cost of operation as such for businesses, as the tax paid on inputs is set off against the tax collected from sale of products and services. Business enterprises in most cases are going to be agents who collect tax on behalf of the government on the value addition done by them and pay the collected amount to the government. How business will get affected adversely is by revenue loss caused by controlled or reduced spending by end users who are living already on a tight budget. For businesses, there is also going to be an additional resource requirement to collect and compile tax, file and keep compliance records. Although tax is to be paid by the consumer, we are already witnessing a tendency for customers to negotiate a reduction in total price to o balance their budget. This could lead to some revenue loss and reduction in the bottom lines.

What will the impact of this be on the cleaning sector?

Cleaning and maintenance services are in the taxable category and therefore all residential, commercial and industrial customers will end up paying 5 percent more for the services effective January 1st. One of the target groups for the industry is the property owners. The present real estate rental market is seeing a down ward trend and where cleaning and maintenance services are offered by the landlord, we expect to see some loss of revenue from both renegotiated lower prices and reduction in the frequency of the services. We also expect this from other target groups. Another issue that could arise is from the long term contract which cleaning companies already have. Typically, some contracts are signed for 3- 5 years and if the tax clause is absent, there may be a possibility of some amount of dispute until the authorities come out with clarification on this, which I am not aware if already exists.

How have you prepared yourself for VAT? What are the various steps that you’ve taken to ensure a smooth transition of VAT in your financial offerings?

We have prepared ourselves for VAT by first trying to gather as much information as possible, which was somewhat difficult initially. We then registered to get our TRN number. We have communicated the relevant aspects to our employees in terms of procedural changes, revision of documents etc., and to customers and suppliers in terms of the need to have the TRN number. We have also got our software upgraded, and stationeries modified to include necessary VAT information.

According to you, what are some of the short-term problems and long-term benefits associated with VAT?

I believe the planning time for introduction of tax, both for the authorities and businesses was short and this may lead to some confusion in the beginning as businesses start to collect and pay taxes and file returns to the government. However, we have seen successful introduction of various new systems in U.A.E in similar timeframes, and I am confident the country has the required leadership to face such challenges. Another issue as I mentioned earlier, is the tendency of customers to renegotiate prices.

VAT is expected to be positive in the long run, as the government will have higher income to spend on the infrastructure projects and others which will boost the core industries of tourism and trade.

Sam Emery, Finance Director, Emrill, gives the Facilities Management perspective

How have you prepared yourself for VAT?

In order to prepare Emrill for VAT compliance, planning primarily focused on education, review of processes and preparation of systems. Technical accounting of VAT and the capability of the financial system is key to ensuring that VAT is accounted for correctly. This is important in order to ultimately avoid fines and penalties. Once this is understood, internal controls and processes are then re-designed around the system to ensure full compliance with the VAT regulations and relevant tax law.

What are some of the implications on the FM sector you foresee with the introduction of VAT this year?

The implications are expected to be the same for the FM industry as most other industry sectors. Generally speaking, implications for businesses may include an additional time and administrative burden on staff, and additional stress on working capital as a result of little or no prior cash flow planning.

But most importantly the main implication will be the lack of knowledge and understanding amongst staff that can stem from insufficient training or investment in education. If this is not properly addressed by FM companies, it could lead to incomplete VAT returns ultimately resulting in fines and penalties. So the key is to plan ahead.

According to you, what are some of the short-term problems and long-term benefits associated with VAT?

Some companies will find it easier than others depending on the complexity and volume of transactions, and the competency levels of existing accounting staff. If Companies have not yet commenced their VAT planning and implementation, then in the short term this could lead tosignificant issues. In addition, problems may arise from the lack of understanding of applicable transactions, additional administrative requirements and the introduction of new modules within the accounting system. Some companies could experience cash flow issues, as VATpayments need to be made on time in order to avoid fines and penalties. So don’t delay, and focus on VAT planning now.

Renoy George, General Manager, Excel International, gives the cleaning & hygiene solutions provider’s perspective

How will the introduction of 5% VAT affect your company and services?

I wouldn’t say that it would affect our company or services directly, but the biggest impact may be on cash flow. A lot of our customers have a long credit period for payments – however, with the VAT procedures in place, we will still consistently be paying our taxes. I believe that the maximum impact will be on the end consumer and, in some cases, facilities like hospitals, schools – where a percentage of services will not include VAT.

How have you prepared yourself for VAT?

We have already completed the registration for VAT and are in the clear. Our accounting process and software has now  been updated to suit the UAE VAT terms. However, what remain unclear are the process and the results of filing  returns, etc. Moreover, the duration for some companies to file their returns differs – what we need to understand is where we fit.

According to you, what are some of the short-term problems and longterm benefits associated with VAT?

I think the biggest advantage of VAT is to the government. But, having said that, I believe that it will offer greater benefits to pump revenue into the infrastructure and in turn offer residents of the UAE better living standards. Moreover, I believe that in time with this extra revenue – any possible cash flow issues across the supply chain will be regulated and as a result this will be better for businesses across the region.

 

 

 
 
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