UAE is going to implement VAT w.e.f. 1st January 2018. The country has never witnessed any tax regulations in the past and therefore introduction of VAT is going to significantly change the way business is done. So, it becomes important for each business to understand the impact of VAT on their business and prepare themselves well in advances to ensure business continuity with least hiccups.
Many professionals have been supporting the business in assessing the VAT impact on their business. However, a large number of professionals, being less familiar with taxation laws in the past, may find it difficult to assess the impact on the business. The write-up is intended for such professionals, either in industry or in practice, to guide them in supporting their clients in assessing the impact on their business.
The impact assessment techniques would be discussed in a series of articles. In present article, we cover business areas which need to be covered within ambit of VAT impact assessment.
The business impact of VAT could be multidimensional and could be segregated in the following broad areas:
Impact on Revenue: The revenue impact could be on supply of goods or services or both. There could be further need to assess the impact on various natures of revenue streams i.e. supply within mainland, supply to Free Trade Zone, exports, supply to other Implementing States, Related Party Transactions etc. Further, the implications could arise in terms of taxability, availability of exemption or not, special treatment in case of mixed supplies, valuation, point of time when liability to pay tax arises, place where tax has to be paid, value of supply etc. All these require in depth assessment of the impact on revenue of the business.
Impact on procurement: Next to revenue is impact on procurement of goods or services. The business makes various procurements in the nature of goods, services, capital goods etc. Further, the source of procurement could be either from within the country or from outside the country. The imposition of tax is directly going to increase the outflow in terms of payment to vendor, however, the final cost shall be minimised due to the availability of right to recover the input tax borne on procurements.
Input Tax Credits: This is going to be most critical aspect in entire VAT impact assessment where business need to evaluate the recoverability of input tax credits, instances where it cannot be claimed, adjustment in input tax credits, refund of taxes, implications in case of non-recovery or ineligible recovery. There is need to assess all expenses minutely to ensure that there is no tax leakages on inward supply which could result in direct increase in cost and eating up the margins.
Supply chain management: The supply chain management set up by an entity prior to the implementation of VAT may require reconsideration in view of the fact that VAT would be applicable on each passing hand resulting in becoming the goods or services costlier in the hand of end consumers with each person in the supply chain. This may require reconsideration of supply chain by reducing intermediaries, consideration of special implications on supply through agents, consignment agent vs. C&F Model, online sale, supply through related parties and international trade. The relook of supply chain would be aimed at reducing the lead time to reach the products to intended consumers with least negative implications on costs and margins.
Sales promotion and marketing policies: Sales promotion and marketing policies adopted by companies in the forms of buy one get one, free supplies, pre-sale and post-sale discounts, target incentive schemes, coupons and vouchers, royalty points, samples, gifts, warranty schemes, commissions etc; would require an in depth re-assessment as to the impact of VAT in terms of applicability of tax on such schemes, recoverability of input tax credits, post sales adjustments, impact on the persons in the subsequent distribution chain etc.
Accounting and internal control system: The Accounting system prevalent in industries across UAE is not robust especially in SME sector considering that there is no regulatory requirement to have proper accounting system. Further, there are no prescribed standards that are required to be followed for preparation of accounts. However, the introduction of VAT has necessitated for all business to have robust accounting system in order to meet the statutory requirements. This would require an entity to reconsider its accounting and internal control system beginning from generation of each document, its recording, reporting and finalisation of financial statements. Further, existing internal control systems may have been built only with respect to pure business needs, but, these need to be realigned to consider the effects of tax implications also.
Records and Documentations: Provisions of the Decree Law are stringent with regard to maintenance of tax related records. Each registrant has to maintain the records of all supplies, imports, exports, tax invoices, credit notes, debit notes, input tax credits, adjustments in tax invoices, reverse charge mechanism etc. Further, reporting has to be made to the authorities for each tax period for transactions undertaken in that tax period. This requires each business to understand the statutory requirements, assess the existing system and analyse as to what extent these records have been maintained and the necessity of making changes therein to ensure that statutory obligations are met.
Changes in ERP systems: This is going to be vital for entire business community as the implementation of VAT would require substantial changes in ERP system. The changes could be in terms of creating new masters code, process flow, tax codes, accounting related aspects, authorisations, generation of documents and other gamut of activities. As ERP systems take its own time for changes, it is imperative for business to consider this aspect on priority so that proper system is in place ensuring business continuity by meeting all statutory and operational requirements.
Human resources Development: This area requires substantial focus especially considering the fact that country had no tax history and the people working in the organisation may not be aware of the tax implications. It is essential not only for accounts and finance team but equally for marketing and procurement teams to understand the ramifications of VAT in their area due to their engagement with outsiders for important business negotiations. The best possible way could be to have tailor made training programs for such persons.
Contracts restructuring: Existing running contracts between parties would require complete relooking to redefine the obligations between parties considering the tax implications. There would be need of price restructuring and special reference of tax clause. It should be noted that price renegotiation has to be not only based on the tax on outputs but after taking into account the corresponding input tax credits. This is going to be more challenging in case of long term contracts. Each business have to actively start restructure the contracts to protect their interest and to make these in line with VAT requirements.
Impact on other laws and regulations: The impact of VAT cannot be done in isolation and would require impact arising under many other local laws. The impact of customs duty, excise tax, municipality tax, licenses and government’s other rules and regulations have to be observed to ensure that these are aligned with each other and while making compliance of one law, the impact of other is also considered and complied with.
Transition impacts: This is going to be very critical phase where entire country would be moving from non tax regime to full tax regime. There could be numerous business scenarios in transition phase i.e. advances received but supply not made, invoice issued pre VAT but supply made post VAT, goods imported but lying in custom warehouse, goods in transit in the course of local sale as well as exports, supply completed but invoice not raised, return of goods supplied before VAT but returned after VAT, price escalation and reductions, debit notes and credit notes for past period, long term running contracts, warranty on goods sold pre VAT period, supply partially completed etc. There could be numerous other scenarios which need to be anticipated and tax impact thereon has to be assessed.
Conclusion: Above are broad areas which require thorough impact assessment by each business. There could be specific requirements for different businesses for which customised plan should be made. But above areas could give an overall approach to the professionals and business in assessing impact of VAT on their businesses.