There is an old proverb ‘Necessity is the mother of Invention’, it means when the need of something becomes essential you are forced to find out ways of getting it. The majority of the GCC economies heavily rely on oil and gas revenues for their incomes and it’s one of the major contributor in their GDP. With falling oil prices globally, it must find out an alternate means of revenue to reduce its dependence on oil and gas sector. Thus, the need to introduce a tax structure comes into picture which provides a preferred means of raising public revenue without much hampering the private sector and industrial growth. Introduction of an indirect tax- Value Added Tax is essentially not a cost-less exercise but is less costly than introducing income tax. VAT is a tax on consumption and is borne by the end consumer. The UAE along with the other GCC members will be introducing a 5% Value Added Tax from 1st January 2018.
So, what are the basic things that a firm should do to make itself VAT ready? Is this mere introduction of 5% of Tax which will be simple to absorb without any prior preparation? The answer to this could depend upon company to company but, everything that is new needs some prior preparation and understanding to adopt it. This can be explained through a very simple example, imagine a mason building a wall, what if the landlord asks him to add one more row on the top to give the wall a desired height? It’s simple, he will easily add up. But, what if the landlord asks him to add a new row at the bottom? It’s a nightmare, as it will shake up the above rows of bricks.
In the same way, introduction of VAT is addition of a new row of bricks at the bottom over which lays the foundation. Businesses who are unfamiliar with VAT will require to make significant changes in their operations and here are the 10 things that will help businesses to get ready for VAT
- Understanding the likely impact of VAT on the business operations, demands for goods and services and competitor’s responses’.
- Understanding the process of applying for VAT registration number and other registration obligations.
- Formulating an implementation strategy and identifying the key touch-points.
- Ensuring the IT systems are VAT-enabled which includes ERP, accounting and POS systems. The IT systems must support the daily tax requirements.
- Keeping the books of accounts and records updated and maintained in an appropriate manner.
- Make sure your incoming and outgoing invoices are VAT compliant on both the parts, supply as well as sales.
- General understanding of accounts payable process that supports the VAT paid and thus supports VAT recovery.
- General understanding of accounts receivable process and identify when VAT should be charged and accurately account for it.
- Revising the terms and contracts of business and to provide place for VAT so that the cost is passed on to the consumers and not suppliers.
- Training your staff for VAT and reflecting VAT duties and responsibilities.
Thus, transition to VAT will likely require significant resources, pre-planning, lead time and so it is advisable for all businesses to start review and preparation process for adoption of VAT. If not applied correctly the new tax may become an additional cost to the business and non-compliance with the tax law will lead to severe penalties.
N.R. Doshi & Partners is a leader in assurance, consultancy, outsourcing and tax advisory services based in UAE for over 30 years. For more information over our tax advisory services please write to firstname.lastname@example.org or email@example.com
By Amrita Bulchandani – Business Manager at N R Doshi & Partners