VAT in UAE
Over 160 countries in the world (yes, you read it right – nearly 80% of the governments in the world) use sales tax (coined as VAT/ GST) as a major source of their revenue. After years of deliberation, the GCC rolled out a common VAT agreement in 2018, with member states given freedom to implement at their own comfort using their own VAT laws altogether falling within the ambit of the common agreement.
KSA(Kingdom of Saudi Arabia) implemented the VAT w.e.f from the date of effect of agreement, 1 Jan 2018, and Bahrain from 1 Jan 2019. Implementation of VAT to a group of nations for which the concept of Tax was alien, especially UAE (where corporate or income taxes are also absent unlike KSA or Qatar), was a daring and challenging activities.
With a well drafted, compact and to-the-point VAT law and support of Federal Tax Authority, VAT is implemented full-fledged from January 2018. VAT is a multi-point tax system whereby the tax is collected by various intermediaries (producers > wholesalers > retailers) and ultimately borne by the end customer (usually the general public who consumes various goods and services).
The VAT is set at a standard 5% rate for all goods and services which is one of the lowest rates across the globe. Except for certain exempt items (financial services, residential, accommodation, etc.) and zero-rated items (exports, international transportation of passengers and goods, basic healthcare, basic education, etc.).
Certain transactions are defined as ‘out of scope’ based on the movement of goods or provision of services (eg:- goods invoiced by a supplier in UAE to a customer in UAE, but the goods are shipped from a country outside UAE to another country outside UAE).
Response from the Economy
The UAE VAT law, regulation, and the cabinet decision were self-sufficient to answer the queries and ambiguities of new law. Further, a good number of user guides and notifications were issued by the FTA wherever it felt the users had chaos.
With the support of all these the FTA was able to facilitate the first VAT return in the month of January 2018 itself much flawlessly. With each tax period, FTA is managing to improve the quality and ease of filing the returns and making payments.
All of these showered a great deal of confidence to the businesses in UAE who took up the new law pretty seriously, and the result was a dazzling more than 100% achievement of the government budget on VAT revenue for 2018 (Dh27 billion vs budgeted Dh12 billion).
Businesses have learned that VAT is not a cost to them and the end customers who were warned a 5% increase in their overall cost of living whole-heatedly accepted the fact that the cost is being directly added to their quality of living.
The public was supportive and welcoming to the VAT law which excluded their basic amenities like healthcare, education, and transportation. However, it needs to be mentioned that any new transformation has some inevitable challenges. There are still some grey areas that the consumers are concerned of.
However, we are hopeful that the tax authorities would clear the path without creating any user distress.
VAT – Who are afraid?
Looking out in the economy, it is seen that a lot of businesses are closing down and expats are going back to their home countries or other nations. On the other side, there is a government department which is exceeding its revenue budgets by collecting the business returns and vat payments on a timely basis.
So the real question is who are the ones resisting the VAT and running away from it? Who are the ones complaining that the VAT is an additional cost and a useless payment for them? Who are the ones being aggressive about not paying VAT telling it affects their cash flow?
The answer is pretty simple – they are the ones who want to hide something from the nation. Utilizing the benefits and resources of this nation and not paying back what is asked for is the last thing we could do for this great country.
Every businessperson out there in the economy knows and understands that VAT is not a cost to them, and they are just an intermediary to collect the VAT from the end-users and remit to the government. Still, there are businesses who do not want to get registered because they don’t want the authorities to know what is happening in their businesses.
Businesses that do not want to issue invoices because they can take all the money and think they save 5%. Businesses who use the 5% collected from the customers for their business purposes and complain they have a cash constraint when asked to make the VAT payment.
Customers who do not want to pay the 5% and ask for the goods/ services without an invoice. Yes, these are the people who want to hide from the regulations and run away from the federal tax system. It is surprisingly sorrowful that such an attitude exists within this economy.
The need for true and fair business
Like every pedestrian who is afraid to jaywalk in a busy road in UAE, every person in the economy is given a clear picture of what the outcome is for a noncompliance.
The FTA is very particular about the compliance of VAT law and related regulations, and any violation is dealt with hefty fines and penalties. Gone are the days were people managed the accounts without any documents.
Unqualified accountants and cooked up audit reports for the banks are a concept of the past. FTA insists businesses to keep clear track and record of all the business-related documents and asks them to be prepared for an audit by authority at any point of time.
Businesses that deal with unaccounted cash, transact without invoices, engages in other activities using the business funds, etc. and appoint an accountant towards the end of the year to ‘create’ a book of accounts for the year can no longer thrive in this economy.
The following steps ensured by the authorities make such acts much vulnerable to being caught:-
- The linking of business bank accounts with FTA:- any transaction happening in your bank accounts is monitored by the FTA and is questioned if necessary.
- The use of TRN number of supplier and customer: The Tax Invoice rules require users to mention TRN number for transactions. If your supplier has violated the rule, you are automatically under surveillance and your TRN number is identified by the FTA.
VAT – What to look forward
The captivating fact that the VAT revenue for 2018 has even excited the budget for 2019 reassures the faith the people of this nation have towards the country.
While some believe that the overall cost has increased and the place is no longer friendly to conduct business, the true believers of this nation and its power has given immense support to the VAT ambit and trusts in the returns this is going to yield. The nation supports each and every person who abides by the law of the land. And VAT is definitely a fuel for the same.