Value-added Tax (VAT) is an indirect tax applied upon the consumption of most goods and services, levied by VAT registered businesses at each stage in the supply chain. VAT is added to the value of the goods and services supplied and then collected by businesses on behalf of the Government at no additional cost to the organisation itself. This tax is ultimately incurred and paid by the end consumer. In the UAE, VAT will be implemented on January 1, 2018 while other GCC countries may do so at the same time or by the same date next year in 2019. Though VAT, as a concept, is not new, it is still the first time for GCC and systems need to be tested for readiness ahead of time to ensure every aspect is taken care of properly.
As per a report published by PWC, VAT will apply to most goods and services excepting commodities like basic food items, essential medicines and exports of goods and international services which are expected to be zero rated supplies. Furthermore other supplies such as healthcare, education, sale or lease of residential property and finance and insurance are expected to be exempt from VAT.
With VAT implementation in the UAE (and GCC) right around the corner, businesses are focusing heavily on various considerations associated with its preparedness like business process impact, technology impact, and readiness of resources to name a few. Companies need to start analyzing their supply chain and tax processes right away, and start to simulate VAT on transactions so they can assess the financial impact and scale of implementation.
The Dubai Computer Group (DCG) organised a three hour seminar for its members the same day UAE rolled out its first announcement around VAT earlier this year. With the aim to educate its members on available information and ensure that they are equipped with all the right tools and resources before the deadline, DCG will be organizing a few sessions around the topic before 31st December 2017, expected in September and late November/early December this year.
For Redington, introduction of VAT is very significant and will touch upon every line of the company’s business in the UAE. This in turn calls for several changes to their business processes, IT systems and also their vendor’s processes in some ways.
Sriram Ganeshan, Chief Financial Officer at Redington Gulf explained, “We are in the midst of planning for several things like changes in processes & systems, training employees, knowledge sharing with partners, assessing business impact, etc. All these are ‘work in progress’ and we intend to get these finished well within the end of calendar year 2017”.
There are some simple steps involved in the implementation, first of which is to apply for a VAT registration number. Partners also need to make changes to the ERP system to include VAT in each invoice that is being raised and recovered where it is applicable. They will also need to set internal timelines for meeting the deadlines for quarterly submission of VAT returns to the authorities.
Managing Director at Tchannl, Sandeep Saihgal said that the company is making sure that there internal processes are in sync much before the implementation date, whether it is updating their ERP system, software or IT infrastructure, etc. The company is also going to make sure that they are in sync with their partners to ensure that their partners are well aware of what lies ahead. “Companies should not wait until the last minute to work on being ready. The Government has given us ample time to understand the mechanics and it is up to us to take advantage of the resources available,” he added.
“Since VAT is collected at nearly every stage of the supply chain, from raw materials to the final product sold in stores, a miscalculation at any of these points can hamper the overall process. Considering the date VAT will come into effect, expected as early as January 1, 2018 in certain member states, businesses operating across the GCC need to activate their VAT implementation plans right away if not already started,” said Aarti Mohan, ERP & EPM Strategy Leader at Oracle.
In general, there is clarity on VAT rates and taxability of various goods and services. The UAE Government is also taking proactive steps by conducting various awareness sessions across UAE and regularly updating MOF website with FAQ’s.
DCG President, Dharmendra L. Sawlani emphasized that while enough information is available about the VAT structure, a few processes still demand some clarity. Few grey areas include export shipments and good sold from Free Zone to Mainland, where things like point of collection etc are not clear.
According to Sawlani since this tax will not be implemented at the same time in all GCC countries, many DCG members are still groping to understand the refund policies for goods sold to neighbouring countries. He also pointed out that another challenge revolves around the ability of retailers to absorb the cost of this tax. If retailers are not able to do so, then with margins that are already thin, they may have toincrease prices by 5% for customers to bear. This may have an adverse effect on consumer behaviour since even without VAT, prices in Dubai are already comparable to those in other countries where tax rate is even up to 20%.
Agreeing with DCG President Sawlani’s opinion, Ganeshan points out that there is still need for better transparency with regard to applicability of VAT laws on Free-zone companies, input VAT obligation for re-exports by mainland companies, refund processes & timelines and few other such aspects.
“Due to lack of historical taxation in UAE, there could be spending cuts from the end customer which may result in lower revenues and margins, companies may have to reduce the margins to be competitive in their pricing of goods and services to accommodate the new taxation requirement,” added K.S. Parag, Managing Director at FVC.
On nuances which may be specific to the IT and telecom distribution industry, the final laws on several finer aspects are still awaited.
With the new tax implementation, several new processes need to be in place that were not a requirement in the past. Naturally, this does require companies to make investments in becoming VAT ready. Such investment is mainly required in the IT & systems upgrade, and awareness & training of the staff to meet the needs and challenges. In addition to this organizations may need to recruit tax professionals in order to fully understand the relevance and importance of compliances and ensure smooth transition.
“We are ensuring that we try and assimilate as much as possible in terms of awareness for our team and we will be updating our accounting systems as well. The main thing is to ensure that our systems are compliant and we need to have a mechanism that ensures that we do not encounter any errors in terms of collecting and remitting VAT accurately,” stated Pradeep Angeveetil, Vice President MEA at Forcespot. “While most VAT related rules seem to be clear, there needs to be a work around for refunds in case we sell to VAT exempted entities,” he added.
For Redington, VAT is not merely a project which is being run by the Taxation/Finance departments. The company is also reviewing different digitalization and storage options to comply with the VAT laws that require the Assesse to maintain all transaction records for a period of 5 years. “We are also keen to ensure readiness of our ERP systems for enabling automation in VAT applications and statutory reporting,” added Ganeshan.
The channel business is driven in large part by the re-export business and hence will not be impacted much, affirmed Sawlani.
Parag also does not expect any significant impact on channel business, however, he feels that implementation of VAT might result in lesser consumer spending affecting the channel to some extent. “We will be informing our partners well in advance about what goods and services would attract VAT so that they can be prepared for the cashflow and financial impact on their businesses,” he added.
The IT industry is prone to high product obsolescence and high volatility in market prices. This leads to a situation of often operating at resale below costs, rebate-centric sell-out and post-sale price support from vendors etc.
“When it comes to implementation, distributors and mid-level wholesalers will have a smooth sail considering that they already have the required infrastructure ready. However, the retailers and small business owners can expect challenges ahead since they either do not have the resources and IT infrastructure in place or are already bearing high real estate costs,” added Sawlani.
“The most important investment for businesses will be in making sure that their systems in use today are compatible and can handle the additional transactions as well as generate the reports necessary for accurate and efficient VAT reporting. This means that (for organisations working across several GCC and other countries), the system not only needs to incorporate all the taxation criteria for each operation, in each geography, but also include and monitor details like third party contractors and their invoices,” said Luis Ortega, Managing Director of IFS Middle East, Africa and South Asia.
“We have begun reaching out to our vendors to discuss possible post-VAT scenarios and our specific requirements from them to ensure VAT compliance. We are in discussions with IT-Service providers to ensure our VAT implementation is well automated. In the coming months, we also plan to reach out to our customers as their understanding and readiness is pivotal for us to achieve effective VAT implementation in the organization,” added Ganeshan.
With new laws being introduced to the region, it is imperative for companies to run customer awareness sessions, knowledge transfer workshops and facilitate impact-assessment for their businesses. Their understanding, readiness and compliance will be pivotal in achieving effective VAT implementation in the organization. Since the VAT system here is not complicated and enough resources have been made easily accessible by the Government, DCG expects most of its members (if not all) to be VAT ready well in time.
UAE has always been the hub catering to the requirements for customers in Middle East and Africa, with businesses being conducted both from the Free Zone and Mainland. Companies in the region are hopeful that the Government is taking adequate care to ensure that such export businesses could still get conducted with the same levels of ease and with no-VAT impact. “In general, we believe that companies that are high on Corporate Governance, Tax compliances and with financial strength would only be positively impacted. This shall be true for channel partners as well. Only after the announcement of Final Laws and regulations along with necessary clarifications, it would be possible to estimate the specific impact on the businesses, channel and any financial impact thereof,” added Ganeshan.
The establishment of clear regulations and efficient administrative processes is vital for VAT introduction to be a success. Businesses will have to adapt to the changes by identifying the impact of VAT on their business. Businesses in the UAE (and GCC) should start planning now how the changes could impact their business, to ensure a smooth transition. While there are a number of challenges that still need to be addressed before it is introduced, VAT will help governments to deliver on long-standing plans for economic diversification away from oil, while still being able to deliver social and economic programs.