Value Added Tax – popularly known as VAT – is all set to be part of the daily parlance in the UAE. Scheduled to be implemented from January 1, 2018, this new system will further strengthen the nation’s revenue from non-oil sources.
VAT is a broad based consumption tax that is based on expenditure and not income. It is imposed on goods and services at every step of the value chain based on the incremental value each stage commands till it reaches the end consumer – the final taxation point.
While the word tax does bring out some negative connotations it is important to understand how this would impact your household financially. Firstly it is important to note it is a consumption-based tax and hence varies based on your consumption habits and pattern. Secondly not all items will have a VAT attached to it, especially in the case of essential goods, meaning your monthly shopping bill might increase but surely less than 5%. However, if you are the takeout / eat out household then expect your monthly food bill to jump by 5%. The VAT impact will be felt the most when you go retail shopping.
And retailers have to be prepared for the VAT effect which goes beyond just implementing the 5%.
The first impact of the VAT is the requirement of taxation professionals with VAT experience. As this is a pan GCC introduction the demand for these professionals is quite high resulting in increased sourcing and relocating costs.
IT System Enhancements
System upgrades and maybe even overhauls are required to ensure the smooth functioning and accounting of VAT. This is a major task and along with bringing in the taxation professionals must be done at the earliest (if not done already).
Assessing the VAT Impact
Each segment of the retail industry would need to analyze how VAT would impact their business in the short and long runs. This is very important and would be the bedrock for the strategy of the organization for the next few years. A general perception is that high margin retail segments like luxury goods and apparel might absorb the VAT in the short run while low margin retail segments like electronics would pass it on to the consumer immediately. However there is no hard and fast rule and each organization will have to see its own strength and stability before making the call.
Discounts and the VAT Component
One of the major challenges retailer will have to address is how to plan their discounting strategies. Do we include the VAT component in the discount or should it be separate? Given the ‘SALE’ culture in the UAE, especially in the retail capital of Dubai, this aspect of the trade is set to have the greatest impact on a retailer’s bottomline.
Understanding the Consumer
This is the most important aspect of the VAT effect. The most important question a retailer would need to answer is: Will my Customer be ready to pay an additional 5% to buy my product? The tourist is also a major factor here as there is still no clarity on VAT refund for tourists who are a vital part of the retail shopping industry.
What does all this mean for YOU?
Relax! At 5%, UAE has a very low rate for VAT (in the UK it is 20%). Various surveys, conducted in the US and Europe, have concluded that a VAT rate of 10% and above would have an impact on consumer spending. Current estimates by experts say that the net impact of the VAT on UAE median households would be around 3%, which is marginal. Furthermore, the initial impact is expected to taper within 3 to 6 months as consumers get used to the VAT impact (similar to Salik).
We, at Eros Group, have already set in motion our adaptation to the VAT policy by appointing experts to do the VAT assessment, assist in IT system changes, register with Tax authorities. We are committed to be fully compliant with the VAT policy initiated by the Government and integrate this with minimum impact to our customers.