United Arab Emirates, previously considered a tax haven, has introduced 5% Value Added Tax (VAT) from 1st January 2018. The statutory authorities have stipulated that any firm having an annual turnover of Dh375000 or greater is required to register for VAT. In the recent months there has been a scramble for registration, considering the hefty fine of Dh20000 for non-compliance.
Small business owners and middle class families are worried about the rise in prices and how it will affect their standard of living.
TIPS TO SAVE TAX DESPITE VAT
As individual enterprises, companies will incur VAT at every stage in the supply chain. But one of the benefits of value added tax is that businesses which purchase goods and services from each other can register as a group for the purpose of taxation. One representative firm can take on the responsibility of complying with the regulations. The companies remain separate entities and the handshake is limited to tax liabilities. This is especially beneficial for small businesses as it prevents duplication of tax.
Restructuring is another way to reduce the effects of value added tax on business. When a company is purchasing raw products on a regular basis from another firm for further processing; the two can join forces to form one entity. The cost of purchasing raw material reduces to 0%. The funds saved can be used fruitfully for statutory tax compliance.
Following a traditional pattern of tax savings, small firms must invest in employee group health insurance schemes. Even if the organizations have to pay premiums, the long term effect is good. When employees are insured they feel safer in the workplace. This will result in improved efficiency, higher production and better annual turnover; thus compensating for the tax burden.
LONG TERM BENEFITS OF VAT FOR SMALL BUSINESSES
Up until a decade ago, the authorities in UAE had depended solely on escalating prices of crude oil to generate revenue. With the rising popularity of alternative fuels, there has been a steady reduction in demand for petroleum. It is imperative for the GCC countries to look for other sources of revenue to maintain the same standard of living.
Any palpable decline in the standard of living that global tourists expect of the UAE; will mean less tourists and consequently reduced turnover for businesses. Small enterprises rely heavily on tourism for sustainable income.
According to the Undersecretary to the Ministry of Finance, His Excellency Younis Haji Al-Khouri, with 5% VAT the anticipated revenue is AED10-12bn in the first year itself.
This will definitely have a positive impact on the economy as a whole. The revenue can be used for improving/maintaining infrastructure, enhancing tourism and making businesses more self-sufficient.
DISADVANTAGES OF VAT
To cover the burden of VAT businesses will have to increase the prices of their products and services. The tax will be passed on to the consumer. Some firms may lose a few of their clientele. But this negative response will last for a short period. Most buyers are creatures of habit. If they are accustomed to certain goods and services they will definitely return.
HOW TO AVOID NON-COMPLIANCE
Whenever a company has to comply with tax related statutory regulations, it has to maintain numerous records that clearly define:
- Working capital and cash flow,
- Operational costs,
- Stages of supply chain,
- Marketing strategies and pricing,
- Accounting and taxation.
Documentation and reporting will increase the annual expenditure of the small concern.
On the other hand, the VAT imposed in the UAE will promote transparency and honesty among the business community and will improve the credibility of small business firms. This will in turn lead to a more evolved economy, better customer relationships and increased profits.
Therefore, it is crucial for small business owners to be well informed about VAT. Computation of value added tax is not an easy process. The best way to avoid any non-compliance issues is to seek professional advice. An advisor can help the firms with the complicated procedures of registration for VAT and related documentation, without jeopardizing their current business goals and objectives. In this transitional phase, firms specializing in Value Added Tax advisory are the safest bet for small businesses.