The nitty-gritty of adjusting to a VAT environment
What we do know today about VAT is this — on the recommendation of the World Bank and the International Monetary Fund, it has been introduced at the rate of 5 per cent in the country. Now, this is quite modest by global standards, and won’t have any inflationary consequences on the economy, or cause much more than a dent to the financial plans of the common man.
Non-discretionary spending, over 100 types of good commodities and other essential service sectors such as health and education are all exempted from this tax. That’s the biggest advantage to living in the UAE … even if a new tax comes knocking at the door.
In other economies of the world where incomes are also directly taxed, the pinch on the individual would be much harder, with an additional introduction of a tax. In the UAE, on the other hand, a great amount of this dread is lost, owing to the fact that no significant income taxes have been implemented.
So, what is VAT? A value-added tax (VAT), simply put, taxes the value that is added at each stage of production incrementally.
Manufacturers, distributors, and consumers would all have to pay some part of the VAT. Value added taxes tend to discourage consumption on non-essential items, because they raise the prices of goods and services. It would apply, for instance, to raw products delivered to a company, the company’s production work with those raw products, and so on up the line to the retailer. The tax is placed on every stage of production until finally being applied to the end consumer.
VAT’s introduction in the UAE is no way regressive as it is in other economies of the world, who introduce taxes on a disproportionate basis. The UAE has been careful, as low-income groups and blue-collared workers have been sheltered from any bumps they would otherwise be subjected to in a taxed economy. Many of the current categories of services and goods are exempt from VAT as they are necessities and make up a large portion of their current cost of living.
In this case, the high-income earners are most likely to be affected by the introduction of VAT, as they allocate a higher portion of their household budgets towards discretionary spending. This may not be enough of an argument to justify a cost of living adjustment to employee salaries, as companies will be reluctant to indulge executives on discretionary spending.
How this might affect other goods and services is a different topic of discussion altogether.
Businesses will not have to pay VAT on their monthly payrolls, and that aspect will not be impacted by the introduction of the tax. There are some businesses that may require adjusting their accounting processes to make it easier to correctly manage VAT, and a lot of these will be those that directly, or indirectly, deal in a B2C paradigm.
Industries like facility management and HR outsourcing, which employ huge workforces in the UAE, often club employee wage costs with service fees and invoice their customers. This can cause a distortion to the amount of VAT they need to collect as the wage element should not be subject to VAT.
Herein would come the problem of rectifying invoicing processes; if no measures are taken to adjust these processes, customers of these businesses will be less than pleased to face an extremely large VAT bill.
Business may face additional employee costs to implement and manage VAT at their companies. To deal with this, I do advise the assistance of audit firms, to ensure that books are in good standing and they are prepared to implement the Tax requirements.
In general, the insurgent tax will strengthen the UAE’s position, and allow the country to continue to grow in a sustainable manner. This will be good for businesses in the long run and assist in growing the economy to new heights.