With the roll-out of value added tax (VAT) in the UAE drawing ever nearer, some businesses and residents are growing increasingly concerned about how the levy will affect their incomes.
But Dinesh Kanabar, the chief executive and founding partner of WTS Dhruva Consultants, a boutique tax advisory firm based in India that recently expanded its services to Singapore and Dubai, says the UAE's new tax regime is very simple and nothing to fear. Mr Kanabar, formerly the deputy chief executive of KPMG India, recently advised the Indian Prime Minister on the country's Goods and Services Tax (GST), designed to replace India's labyrinth of levies with a uniform system, which was rolled out in July.
The UAE and Saudi Arabia will implement a 5 per cent VAT from January 1, with the other four Arabian Gulf countries expected to follow suit in 2018; a 100 per cent excise tax on tobacco products and energy drinks, and a 50 per cent tax on sugary drinks, will start today.
The introduction of VAT could generate Dh12 billion in its first year and Dh20bn in its second year, according to Sultan Al Mansouri, Minister of Economy, as the country moves to diversify away from its reliance on oil revenues.
Mr Kanabar outlines how VAT and excise duties will affect the UAE economy, small business owners, and the pockets of UAE residents:
QWhat are the similarities between the VAT regimes in India and the UAE?
AIndia is a hugely complex market and GST really was an aggregation and simplification of the law. In India you have five rates of taxes for goods, four for services and three types of GST, with the highest rate at 28 per cent, and over and above that there is a cess (an extra levy on goods such as carbonated drinks, coal, tobacco and luxury cars), so it is as complex as it can get. In the UAE, on the other hand, you only have one rate with three possibilities.
What are those possibilities?
First there is 5 per cent VAT on taxable supplies, then you have a set of goods and services that are exempt, so for example there is no VAT on education, medical services, public transport and residential real estate. Third you have a group of items that are zero-rated, such as airline companies, metals and gold. So when people say the UAE's tax regime is complicated, it depends on what you compare it to. Yes, moving from a regime where there is no tax to this is complicated, but if you compare it to Europe it is not at all complicated and if you compare it to India, it's child's play.
If it is such a simple model, why are some businesses and individuals getting stressed about it?
I think it's a matter of perception. So far it has been a tax-free regime, so when you suddenly talk taxes to people they just get stressed. But there is no need to get stressed for a number of reasons. Firstly, you have never seen as proactive a government as you are seeing here; they are coming out with FAQs, they are doing seminars, they are training people and they have a portal up and running. Compare this to India where after GST was implemented, people started to complain and then they started making modifications. Here they are hearing people's concerns before implementation.
What are the other reasons to stay calm?
The second reason is that it is a very simple law. In fact, the compliance form is just a half page return. In India the compliance is so difficult that the computer system is unable to take it and the compliance dates keep being changed. The third is the rate itself. In India the generic rate at which GST is levied ranges from 5 per cent to 28 per cent; in Europe the rate is anywhere between 14 and 16 per cent.
What should businesses preparing for VAT be concerned about now?
They should be looking at three things. One, how are they restructuring the business? For example, a group has multiple entities and one is a sourcing entity that sources the goods and gives it to a selling entity; unless you are defined as a group under tax laws, the moment you do an inter-group transfer there is a tax, so you are out of pocket before you recover the tax from the ultimate customers. Those sort of inefficiencies need to be removed. The second thing is to make your processes and IT systems compliant so that all the provisions of law are incorporated.
What's the third?
For the third, and maybe this is one of the reasons that people are stressed out, is that today companies prepare accounts and those accounts are not really subjected to any scrutiny by a regulator. Now for the first time a regulator is going to look at the accounts – that means you've got to preserve the accounts, you need to ensure their authenticity and you need to be worried that when compliance happens you are ready so that if you were audited you can substantiate whatever you are buying.
How will small businesses with a handful of employees cope?
There is a threshold limit of Dh375,000, so if your annual turnover is less than that you are not in the VAT net at all. For smaller businesses that are in line for VAT, they need to look at using apps – which are being developed by private consultants – that can capture the data from the business and do the filing for them so that the cost of compliance is not burdensome.
What about the average UAE resident worried about the cost of living?
Is the cost of living going to go up? The answer is yes. Is it significant? The answer is absolutely no because there is a World Bank report that says that the expected impact of inflation is somewhere between 0.5 and 0.6 per cent. So that's not earth shattering and I don't see a dent in people's savings or investments.
Is there anything households can do to prepare?
There is nothing they can do. Businessmen, yes, they need to start building compliance, but for an average person, the very fact that day-to-day items – whether houses, education, medical care or public transportation – are outside the limit shows that the government is conscious that people in the lower strata, whose bulk of income goes towards necessities, are not impacted at all. Will your grocery bills go up? Yes, they will, but as I said the expected impact is low.
So residents should view VAT as a positive move?
You are moving from a laissez-faire environment to a regulated environment and that is actually very welcome because the world is moving towards regulation. By imposing a tax, the GCC is falling in line with what the world is doing and I go back to the rates issue: Singapore is 7 per cent, Malaysia is 6 per cent – I'm not aware of any place in the world where the VAT is as low as 5 per cent.
But the UAE is already an expensive place to live and the perception is that it is going to get more expensive?
It really depends on where your income goes to. If you are a smoker, for example, and smoking is 10 per cent of your total spend then your costs will go up more because of excise tax. To an extent it is the people that are able to save after buying the necessities, that are spending on luxuries and therefore can afford to contribute, that will be really impacted.
Are businesses ready?
The answer is no. We have seen in the marketplace that the larger businesses are aligned and they started huge exercises on VAT implementation months back. There are smaller / mid-sized businesses that are now coming to grips with reality that the government is serious. There is some expectation in the air that this is going to be postponed but the government has been very categorical that there is no intention to postpone. So if you are going to put it on the back burner then you do so at your own peril.
How late can small business heads leave it before starting preparations?
It's already late. When we get called by clients, they say "we'll start tomorrow" and we say "guys, we have physical limitation on the number of people we can depute because if all of you are going to wake up at the last minute, how are we going to be able to provide professional help?" People need to start immediately because on January 1 the law comes in and that means you start making recoveries. Then your compliance begins in April because your first quarter's return goes out on April for the period from January to March.
What do businesses need to have in place by January 1?
They need to have an accounting system and a billing system so the IT infrastructure needs to be in place because every single invoice produced from January 1 has to have that VAT component. One of the issues is that non-compliance could invoke huge penalties so people need to be absolutely sure that they are fully compliant – they can't afford to take chances with compliance.
What trends are you noticing?
There are some companies clutching at straws. A report came out today saying that the non-implementation of VAT in other GCC countries should not impact the UAE. People interpreted this to mean that the UAE is also going to postpone. It is going to happen and they need to prepare.