How VAT Has Become An Integral Part Of Taxation System?
Jan 25, 2019

VAT! How it All Started?

Genesis being World War I in Germany, VAT has gained recognition and its modern shape in the 1950s, after implementation in Ivory Coast, a French Colony. Evolving since then, VAT has now become an integral part of the taxation system of more than 150 countries across the globe. Most organizations of Economic Cooperation and Development forms a majority of industrialized nations around the world have adopted VAT.

What is VAT?

VAT the abbreviation of “Value Added Tax”, is an indirect tax, charged at every stage of distribution. Since the inception of goods or services i.e. from producer to consumer, VAT is levied at every stage of the transaction. Raw material supplier charges VAT on goods invoiced to a manufacturer, and the manufacturer further charges VAT on sale of finished goods. This process continues unless both goods/services are sold to the ultimate consumer. VAT has become a part of the supply, having the price rise as its ultimate effect. This is worthwhile to mention that VAT paid on goods/services purchased is available as credit. The total VAT payable is the difference recorded between the output and the input VAT for the period under reference.

How it Does Help?

It makes one curious that how VAT has gained so much popularity over a short span of time. The successful implementation of VAT in various countries has made it evident that it is an effective and efficient system of tax collection. The rising figure of government revenue imparting transparent trade culture has been added the feature. The following enumerations elaborate on the merits of VAT:

1. Cascading Effect

The cascading effect wherein the consumer ends up paying “tax on already paid tax” is mitigated by the VAT credit system. It is paid till the immediately preceding stage of value addition is available as credit to the registered dealer. While determining the net VAT payable, VAT credit is reduced. Consequently, VAT is only used to extent the value added by the dealer.

2. Participation of Mass

As VAT moves through the entire supply chain, it spreads over the transaction. Also, the tax expense is distributed to masses and the VAT is borne by the consumer standing last in supply chain. This leads to the participation of public at large, for higher tax collection with a slight increase in the value of goods and services.

3. Administration

Administration of VAT is easier and transparent. Value addition process of goods and services is distributed over a series of checkpoints before it reaches the ultimate consumer. This series of transaction formulates a trail, leading to reduction in opportunities of tax evasion. Any disruption in the entire system can be easily identified as it affects the immediate next link of the supply chain of value addition.

4. Reinvestment in the Area of Origination

The increased government revenue due to siphoning of public money through VAT enhances the development prospects. Revenue being reinvested creates the opportunities for infrastructural development, employment and injects the blocked money into the economy.

VAT in UAE, Voila!

VAT Tried and tested in diverse shapes and sizes across, UAE was eventually tempted to adopt it. Pursuant to the Common VAT Agreement of the States of the Gulf Cooperation Council (GCC), VAT has been implemented in all member states of GCC. Dawn of the year 2018 i.e. January 1st, 2018 was its advent in UAE. Federal Decree Law No. (8) of 2017 on Value Added Tax is the statute governing the applicability of VAT. Federal Tax Authority established by Federal Law Decree No.13 of 2016, is the regulator of the new tax regime.

Tax in UAE?

Introduction Of Tax In UAEUAE, an economy with negligible taxes has been a hub to businesses and attracted the entrepreneurs globally. However, with the introduction of VAT in UAE, people are gazing the probable reasons for a new tax.

Oil and other hydrocarbons are crucial driving factors of UAE’s economy. The budgets entirely depend upon the revenue generated by the aforesaid factors. With the falling prices in the international market and depleting resources of oil and other hydrocarbons, alternative revenue sources are sought for. The state expands on providing high-quality services like hospitals, roads to its citizens and residents. GCC envisions to employ an additional source of revenue to the state to upkeep the quality of services. It further reduces the burden on existing sources of income.

VAT, at a Glance

The newly introduced tax regime is attributed with following

1. Registration

Business entities in UAE have to register for VAT if the value of their taxable supplies exceeds AED 375,000.00 over the previous 12-month period or expected to exceed that threshold in the next 30 days. Voluntarily registration can be made if supplies and imports are expected to exceed AED 187,500.00. These registration thresholds apply across the UAE.

2. Standard Rate – 5%

Instead of wide rate range of VAT on different classes, the uniform rate of 5% is introduced. Both the levy and assessment of VAT becomes easier as there is no confusion in regard to the rate of VAT applicable on supplies.

3. Zero Rate of Tax

The basic supplies at large extent are either exempt or categorized to zero rated supplies. This ensures waiver of the added burden of VAT on basics for sustenance in UAE. The 0% rate is applicable on exports of supplies outside the GCC. This aims to encourage such activities, being the key area of business for the UAE in the current scenario. The education, medical equipment, healthcare and the supply of commercial aircraft, buses and trains are chargeable at 0% of tax. Along with this the international transport services (for both passengers and goods), certain investment grade precious metals, newly constructed or converted residential properties, crude oil and natural gas are also chargeable at 0% of tax.

4. Exemption

The regulator has exempted numerous supplies including life insurance, residential buildings, bare land and local public transport services etc. from the applicability of VAT. These exemptions are given in exercise of powers conferred to the regulator. The basic intent is to promote growth in specific sets of trade.

5. Distribution of VAT Liability

The new tax regime is aimed at collection of VAT at each and every stage of supply instead of single point tax. Although the ultimate burden of 5% on supply is borne by the consumer, VAT is distributed and collected over the entire supply chain.

6. Refund of VAT by Tourists

With the effect from November 2018, the tourists can request for refund of VAT paid by them on purchases made in UAE. The refund request will be processed and paid if the purchases meet the eligibility criteria.

Following are the brief details of the merits of the implementation of VAT in UAE.

1. New Source of Income

The new tax regime enables infusion of working capital in the economy and thus enhances the stability of the economy. It overall enhances the Gross Domestic Product which in itself is an indicator of healthy and growing economy.

2. Improved Infrastructure

A country, either developed or developing, needs substantial expenditure on its infrastructure. A developing country engages its funds in establishing infrastructure whereas a developed country strives to improve the same. Being, an added source to state revenue, VAT will enhance the investment horizons. These investments will not just create infrastructure, but will also attract investments from across the world.

3. Non-Financial Benefits – Transparency

It may sound cumbersome to implement a tax law in the UAE. The reason is pretty obvious that there is no tax existed in past. With the introduction of VAT in UAE, the expenses might inflate a bit. However, on the counter end, there is an increased level of transparency in both the business and the economy. Further, it creates a database on the basis of which informed decision can be made.

4. Increased Business Efficiency

An initial rise in cost implementing VAT may discourage the Businesses to introduce it. But however, there are certain long term advantages that can be derived from VAT implementation. Once VAT-compliant systems are installed, businesses will run far more efficiently. This will gain a long-term benefit from the streamlining exercise.

5. Advisory Opportunities

The implementation of VAT creates an opportunity for professionals and experts who are specialized in it. To avoid complexities of newly implemented tax, business houses will assure hiring of professionals to create VAT compliant enterprise. Instance may exist where companies will be willing to outsource its function to comply with VAT laws.

Considering all the adversity and advantages prevailing after the implementation of VAT in UAE, it is very much clear that there is a need of fully equipped professional to create a VAT compliant entity. The non-compliance of VAT law has both financial and non-financial implications. Offering one-stop solution to all the issues relating to VAT, Beyond Numbers comes with a dedicated team of professionals. We are here to serve you since the inception of VAT in your entity i.e registration, followed by accounting for VAT, tax planning, strategic advising, report preparation, and filing returns to the VAT authorities.