VAT in UAE: What you need to know

Although the roll-out of the new tax policy is already months away, many questions still hang in the air.

In 2018, consumers in UAE are expected to pay a 5 per cent value-added tax when purchasing most goods and services.

The six states in the Gulf Cooperation Council (GCC) region have agreed to implement VAT, which will generate $25 billion (Dh91.8 billion) in tax proceeds every year.

The new tax policy’s go-live date is only less than a year away, yet many questions still hang in the air. Gulf News collates information from various sources, to answer some of these queries.

Will I pay VAT every time I purchase something at the grocery?

No. There will be a number of items in your shopping cart that will be VAT-exempt. Younis Al Khouri, undersecretary at the Ministry of Finance, has said that GCC states had already agreed to exempt about 94 food products, as well as healthcare and education sectors.  That means your grocery, hospital or school bills will most likely remain unchanged, unless there are price hikes. A new law, however, has yet to be released to specify which of the items are non-taxable.

When I buy electronics, clothes, home furnishings and other non-essentials, shall I expect to pay more once VAT is implemented?

Yes. Since VAT is going to be levied on non-essentials, expect to pay a tax when buying electronic items, home appliances and other big-ticket goods. If you want to own a brand-new mobile phone that costs Dh2,600, for instance, prepare to pay an extra Dh130. “There would be definitely an additional payment on non-essentials,” said Rakesh Pardasani, partner at RSMi.  “In some cases for white goods, manufacturers may absorb some of the 5 per cent, to keep their products competitive but yes, the end consumer can expect to pay more.

How about buying airline tickets, will it also be taxable?

Since the VAT law is not out yet, there is no definitive answer to this. But judging by the VAT implementation in other countries, there is a likelihood that the price of airfares won’t go up because of VAT. “We will have to wait and see, but if we look at examples in other countries, for instance in the UK as well as in Singapore (where VAT is called GST), passenger transport carries VAT at zero percent.  So, it is expected that air tickets in the UAE may be carrying similar VAT rate of zero percent,” said Pardasani.

Will the 5 per cent VAT increase the cost of living in UAE?

The cost of living will likely go up slightly for a lot of people, but this will all depend on the individual’s buying preferences and lifestyle. If you keep on taking home things that are taxable and maintain an expensive lifestyle, expect your outgoings to increase. “If you ask me, I don’t think 5 per cent will break the bank,” said Pardasani, when asked whether VAT will make dining at restaurants costlier. “If one is to spend mainly on items which are not attracted by VAT, then the cost of living of the individual is unlikely to have any significant increase,” according to the Emirates Chartered Accountants Group.

Will tourists also pay VAT?

Yes. Tourism spending is a major source of revenue for the UAE and goods purchased by visitors will not be exempted at the point of sale. Anyone buying perfumes, make-up, luxury bags and big-ticket items in the UAE can expect to pay an additional 5 per cent of the sale price. The Ministry of Economy, however, assured that the tax rate is “deliberately low so that VAT is a limited burden on all consumers.” It also remains to be seen if tourists will be given the option to obtain a tax refund at some point, as observed in other countries.

What other taxes is the UAE considering?

The UAE is not discounting the possibility of collecting other forms of tax. “As per global best practice, the UAE is exploring other tax options as well. However, these are still being analysed and it is unlikely that they will be introduced in the near future. The UAE is not currently considering personal income taxes, however,” said the Ministry of Finance.

Will businesses be penalised if they don’t collect VAT?

Businesses are encouraged to implement the new tax system, but the Ministry of Finance said that the government is currently in the process of defining the exact fees and penalties for non-compliance.

When will registration for VAT begin?

If the initial date for the VAT roll-out is followed, businesses can probably start registering for VAT from 1st October 2017. As announced recently, the registration will be open three months before the go-live date. Companies will have the option to register online.

How often are companies required to file VAT returns?

For most businesses, VAT returns should be filed every three months. Filing of returns can also be done online using the government’s eServices.

What should businesses do to prepare for VAT?

According to the Ministry of Finance, businesses may  need change their core operations, financial management and book-keeping, technology and human resource mix in order to prepare for VAT. “It is essential that businesses try to understand the implications of VAT now and once the legislation is issued, make every effort to align their business model to government reporting and compliance requirements.” Businesses are also strongly advised to ensure that in all the commercial contracts they enter into, they include a clause that spells out that the VAT burden can be passed on to the consumer.

“Once the law is out, businesses would first have to figure out whether their products/services are taxable or not and if yes, they would have to ensure that their billing or invoicing process is capable of adding a VAT charge to all taxable products. The easiest way to do this is to alter your IT systems to automatically calculate and add VAT to the invoices,” said Pardasani.

Should companies start hiring VAT professionals?

Hiring new staff that will enable businesses prepare for and implement the next tax policy should be done at this point in time. “Companies should have started to think about the additional resources they would need to ensure VAT compliance.  Depending on how tedious / frequent the process is, companies would need resources based on the complexity of their operations.  But one thing to bear in mind is that VAT is not only a finance issue,” said Pardasani.  “It flows through all operational departments of the company.  This is because wherever a company acquires products or services, it may pay VAT and it would need to capture all the documentation relating to VAT paid, in order to claim refunds.”