If you’ve felt the panic setting in with VAT 2018 around the corner, you’re not the only one. Luckily we’ve got you covered with our VAT 101 Series.
VAT is likely to be introduced across the UAE and the rest of the GCC on January 1, 2018. The rate will be low and is likely to be 5%.
The registration will start three months in advance which is October 2017 and businesses can register online. More clarity will follow once the law is out.
Let us start with the ABCs of tax to get us going.
The meaning of Tax: Tax is a compulsory contribution to state revenue, levied by the government on workers’ income and business profits, or added to the cost of some goods, services, and transactions. There are two types of taxes:
Direct Taxes: These are collected directly from the person on whom it is imposed eg Income tax
Indirect Taxes: The tax is called indirect tax because it is not levied directly on the bearer. The person who deposits the tax is not the bearer. These are collected indirectly from the person paying the same. There is an intermediary (e.g. a retail store or vendor) who is responsible for collection and deposit but is paid by the end user. e.g. Sales tax or VAT.
And this is where we fit in
VAT is an indirect tax and is the most common form of Goods and Service tax or consumption tax all around the world. Around 150 countries in the world have VAT or Goods and Service tax.
VAT is a tax which is applicable at each point of sale where value has been added, from inception to the end user. The end user pays the VAT and the earlier vendors in the whole cycle of production can claim back the previously paid VAT.
So it is levied at each stage in the chain of production of goods and services with the provision of a set-off for the tax paid at earlier stages in the chain.
The GCC Governments need to diversify the income sources considering that the existing revenue is reduced because of falling oil prices. They’ll then use these funds to provide public facilities, roads, parks, hospitals, waste control, police services, defense and other public amenities.
VAT is a source of revenue for the government, which will contribute to government revenue and, in return, provide better public services to the residents.
Franklin Delano Roosevelt (Ex- US President) once remarked that “Taxes, after all, are dues that we pay for the privileges of membership in an organized society.”
VAT is one of the best forms of taxation due to benefits in its execution and thus leading to achieve the final purpose effectively which, in theory, is betterment of the society. It also promotes investments as the economy is more stable.
Let’s understand the whole process of VAT by a simple example
Take an example of the shoe manufacturer who buys leather and sells shoes to final consumers through a distributor and retailer, and sees at what levels VAT will be paid by the consumer and how the government collects this VAT.
For the sake of simplicity, we will assume 10% VAT.
a) The manufacturer buys leather from the leather seller for Dhs100 and pays AED 10 VAT (10%), so, in total, he pays Dhs110 including tax. It is the responsibility of the collector of the tax to deposit this with the Government, so, the leather seller will pay Dhs10 VAT to the Government.
b) The manufacturer then converts the leather into shoes and sells the shoe to the distributor for Dhs200 and collects Dhs20 as VAT. His responsibility is to pay the differential amount of tax to the government and he pays Dhs10 as VAT (Dhs20 – Dhs10)
c) The distributor sells the shoes to the retailer for Dhs250, collects AED 25 as VAT and claims AED 20 paid earlier and hence pays the differential of AED 5 as VAT to the government.
d) The retailer finally sells to the end consumer for AED 340, collects VAT of AED 34 from him and claims AED 25 paid by him to the distributor — so finally pays AED 9 to the government.
In this cycle, VAT is collected by the government at four stages, and the total amount collected is AED 34 as shown below, and the end consumer pays it.
Purchase price VAT paid @10%
(1) Sale price VAT received @ 10%
(2) VAT paid to Govt.
(2) less (1)
a) Leather seller 100 10 10
b) Manufacturer 100 10 200 20 10
c) Distributor 200 20 250 25 5
d) Retailer 250 25 340 34 9
How is this going to affect the consumer?
A very commonly asked question is whether VAT will affect our food, education, or health bills? The simple answer is not much; there are around 94 essential food products which are exempt and also, the education and healthy sectors are out of VAT as per the Ministry of Finance.
The exact list will be out once the law is out but looking at the VAT in other countries and based on information by Ministry of Finance in UAE, essential food items, health and education will be exempt from VAT.
Look out for more articles on VAT as to registrations, implications, procedures, returns, documents to be maintained, penalties in the next few months to help SMEs and other businesses prepare and be ready for VAT.