VAT in UAE: Things You Should Know About GCC VAT System

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Kritika Pandey

Senior editor

Parul Saxena

Chief editor

Last updated: April 13, 2021

Gulf countries will be implementing the Value Added Tax (VAT) for the first time starting January 2018.

VAT concept is quite novel to the region’s business and residents alike. Businesses, residents of GCC countries and visitors are rushing against time to understand the new tax law and how it will affect their daily operations. VAT in UAE and Saudi Arabia set to roll-out VAT early 2018.

To increase awareness about the new tax law, VAT in GCC, 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 GCC states implementing VAT?

For decades, gas and oil revenues have been the backbone of GCC 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 of Gulf economies are committed to huge capital investments and expenditure, the governments may not sufficiently sustain projects with low revenues coming from the sale of oil. Plus, dwindling oil reserves (like the case with VAT in UAE) is putting countries in a very precarious situation – financially.

According to the IMF projections, if the GCC 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, GCC countries have been forced to seriously implement tax reforms. 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.

VAT in UAE

What will be taxed?

As part of the GCC countries agreement, the Vat in UAE will impose 5% VAT on water and electricity bills, foods, jewelry, gold and number of other non-essential goods.However, the certain item including tuition fee, medicines will be exempted from tax.

Who will be taxed?

Business 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 an 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.

Consumer will need to pay more for any non-essential item, if you’re buying TV set worth AED 8,000, expect to pay AED 400 more.

Residential buyer and seller 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 point of entry for goods imported to GCC. However, no duties will be payable for goods that are moving outside GCC destination within a specific timeframe.

Tax in GCC

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 implications of implementing VAT on GCC countries?

According to a new study conducted by Oracle and Harvard Business Review (HBR), the implementation of VAT in GCC countries is poised to trigger a massive wave of digital transformation. The study, which was based on poll of 450 senior executives across GCC 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 means business will have to automate their processes so that every transaction is captured flawlessly. While cloud adoption across Gulf Cooperation Council countries is growing at a rapid pace, 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 further drive this trend

After exploring the current VAT preparedness levels of businesses across GCC countries, the 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 additional 47% said they were awaiting further guidance from the local governments.

UAE countries

Obstacles to implementing VAT in UAE and other Gulf countries

As business 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 that is threatening to derail them from their journey to be VAT-compliant.

The VAT in GCC agreement stipulates that if two GCC countries successfully implement VAT law by January 2018, the rest of the countries in the block should implement the same within a year. As VAT in UAE and Saudi Arabia set to roll-out VAT early 2018, other countries are likely to implement that 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 GCC countries to immediately get started by performing “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% respondents felt that GCC 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, Indians 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 alike comply with the VAT regulations. Among the sectors, the Indian CAs are set to work on include real estate, oil and gas and retail.

Challenges to implementing VAT in GCC

Summing it up

As the oil and gas revenues take a dip, VAT in UAE and other gulf countries will make a useful tool for tax authorities to generate the money needed to fund the governments’ projects. Business 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 GCC 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 GCC countries.

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Working as Software Analyst I prioritize my work and like to plan and organize accordingly. I also have good analytical skills and a proficiency with digital marketing tools. I am always looking for the opportunities to grow up both professionally and humanely.

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