The VAT concept is quite novel to the region’s businesses and residents. Businesses, residents of Gulf countries, and visitors are rushing against time to understand the new tax law and how it will affect their daily operations. The UAE and Saudi Arabia VAT are set to roll out in early 2018.
To increase awareness about the new tax law, VAT in the Gulf, the UAE chamber of commerce has been holding workshops for businesses and companies. Besides, the ministry of finance occasionally holds briefings to educate financial advisors about the implications of the new tax law.
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Why are Gulf states implementing VAT?
For decades, gas and oil revenues have been the backbone of Gulf economies. In fact, between 2011 and 2014, the combined revenue from oil and gas sales accounted for 70-75% of total government revenues.
Since most Gulf economies are committed to huge capital investments and expenditures, the governments may not sufficiently sustain projects with low revenues from oil sales. Plus, dwindling oil reserves (like the case with VAT in UAE) are putting countries in a very precarious situation – financially.
According to IMF projections, if the gulf countries don’t implement reforms, they will be staring at a combined fiscal deficit exceeding $700 billion between 2015 and 2019. To bridge the gap projected to remain at 6.5% of GDP in 2020, Gulf countries have been forced to implement tax reforms seriously. Implementing VAT in Dubai is expected to yield AED 12 billion in the first year and up to AED 20 billion during the second year.
What will be taxed?
As part of the Gulf countries agreement, the UAE will impose 5% VAT on water and electricity bills, food, jewelry, gold, and other non-essential goods. However, certain items, including tuition fees and medicines, will be exempted from tax.
Who will be taxed?
Businesses with taxable goods or services with an annual turnover of more than AED 375,000 will be required by law to register for VAT.
- Businesses with taxable goods and services over AED 187,000 and below AED 375,000 will have the option to register for VAT.
- On the other hand, businesses that provide education and health services will be able to reclaim VAT value from the government.
Consumers will need to pay more for non-essential items; if you’re buying a TV set worth AED 8,000, expect to pay AED 400 more.
Residential buyers and sellers won’t attract VAT on any residential property transaction. However, sales of any commercial property will attract a standard VAT rate.
Exporter/Importer will require paying VAT at the point of entry for goods imported to the Gulf. However, no duties will be payable for goods moving outside gulf destination within a specific timeframe.
What if a business fails to comply with the new tax law?
Failure by a business to keep the required records and any other information as per the new law will incur:
- A fine of AED 10,000 the first-time offenders.
- A fine of AED 50,000 for a repeat offense.
What are the implications of implementing VAT in Gulf countries?
According to a new study by Oracle and Harvard Business Review (HBR), implementing VAT in Gulf countries is poised to trigger a massive wave of digital transformation. The study, based on a poll of 450 senior executives across the gulf revealed that about “73% of businesses consider VAT implementation a key opportunity to initiate wider digital transformation projects within their organizations.”
To ensure compliance with the new tax law, businesses must automate their processes so that every transaction is captured flawlessly. While cloud adoption across Gulf Cooperation Council countries is growing rapidly, the advent of the new tax law has increased the speed at which businesses are going to the cloud.
According to Arun Khehar, senior vice-president Oracle Eastern, Central, Europe, Middle East, and Africa, “Cloud spending across the META [Middle East, Turkey, and Africa] region will reach $715 million in 2018, and VAT compliance is expected to drive this trend further.”
After exploring the current VAT preparedness levels of businesses across gulf countries, Oracle/HBR found out that about 21% of respondents have set up initiatives to comply with the new law.
However, 30% of respondents revealed that they didn’t have sufficient information on VAT, while an additional 47% said they were awaiting further guidance from the local governments.
Obstacles to implementing VAT in UAE and other Gulf countries
As businesses run against time to comply with the new tax law, there are challenges they have to surmount:
The challenge of managing business process changes –
68% of the respondents felt this is the key impediment threatening to derail them from their journey to be VAT-compliant.
The VAT in Gulf agreement stipulates that if two Gulf countries successfully implement VAT law by January 2018, the remaining countries in the block should implement the same within a year. As VAT in UAE and Saudi Arabia are set to roll out VAT in early 2018, other countries are likely to implement that in mid-2018.
“With just a few months until VAT goes live, many companies urgently need to change their business processes, IT systems, and scale up their workforce,” said Aarti Mohan, ERP and EPM application strategy leader, Oracle.
The strategy leader advises businesses across the Gulf countries to immediately get started by performing a “360 assessment across the business to evaluate the potential impact and transformation needs” of their business.
Lack of qualified internal tax experts –
According to the study, 38% of respondents felt that Gulf didn’t have sufficient qualified tax experts to implement the new tax law. There is a great demand for professionals who understand how VAT works.
For instance, Indian professionals, known for implementing one of the most complicated tax regimes – Goods and Services Tax (GST), the VAT in UAE is much easier to implement. That’s why VAT in UAE, for instance, is turning to Indian chartered accountants (CAs) for assistance in interpreting and implementing the new tax law.
Besides, most countries in the Gulf are comfortable with Hindi, making Indian professionals the most preferred group for helping businesses and companies comply with the VAT regulations. Among the sectors, the Indian CAs are set to work on include real estate, oil and gas, and retail.
Summing it up
As the oil and gas revenues dip, VAT in UAE and other gulf countries will be useful for tax authorities to generate the money needed to fund the government’s projects. Businesses will charge VAT on sales, not profits, at the standard rate of 5%. Businesses that will fail to comply with the new laws will be penalized. However, the Gulf treaty allows each country to use local laws to implement the VAT terms. That means critical sectors like education, healthcare, financial service, and food will be treated differently across the Gulf countries.
Chirantan Patel is the Product Manager at Softwaresuggest & Callhippo, an Inc. 275 company that researches and analyzes software to educate, advise, and connect buyers and sellers of business technology.
