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What are the major impacts of VAT

In this article, KT has assessed the impact of VAT on businesses, individuals, government and overall economy

Since VAT is a consumption and multistage tax, so it has an impact on each player of the supply chain and individuals, who are buying the goods and services for consumption purposes. It has an effect on the economy and it is a major source of revenue for the government. In this article, we have assessed the impact of VAT on businesses, individuals, government and overall economy.

(a) Impact of VAT on businesses

There are some common impacts of VAT on each business and some specific impacts, based on the categories of supplies.

(i) Common Impacts of VAT on Businesses

Whenever VAT is being introduced in any country, every business is required to have an impact assessment to assess the impact of VAT. Based on the impact assessment, they will be able to know, on which areas of business VAT will have an impact and what are they required to do to implement it properly. Like based on the impact assessment, they will be able to adopt the proper tax position of their supplies. Businesses will be able to know eligibility of VAT registration, impact on their working capital and system, required changes in the processes, compliance requirement etc.

Based on the impact assessment, businesses are required to implement the VAT properly which requires changes in the system, tweaking existing processes, training to the employees, communication with the suppliers and customers etc.

Once the VAT is up and running, businesses are required to submit the VAT Return, and while submitting the VAT returns, businesses cannot claim input tax on some purchases/expenses like expenses for throwing parties, expenses related to Car which can carry less than 10 people and is available for personal use, expenses related to the dependents of the employees where companies have no legal obligations, non-business expenses etc. All such blocked input tax will become cost of the businesses.

Businesses requires work force to comply VAT so it will lead to increase in administration and hiring cost. Sometime, companies are required to hire consultants which will lead to increase the consultancy charges.

(ii) Specific impact of VAT on businesses

So far as specific impact of VAT is concerned on businesses based on the categories of supplies, the industries that are dealing with standard rated supplies, VAT will impact the purchasing power of their customers and it will have a negative effect on the demand of their supplies. VAT registered companies which have longer payment terms with the customers and shorter payment terms with the suppliers, VAT will have adverse impact on their working capital, and vice versa.

Businesses which are dealing with the exempt supplies, like local passenger’s transport, banks and financial institutions offering margin-based services, suppliers of bare land etc will not be able to claim related input tax and such input tax will become their cost which will lead to increase in the operating cost of the business. Most probably, such businesses will pass on this cost to their customers by increasing the prices of their supplies to achieve their targeted margins so it will have a negative impact on the purchasing power of their customers which will affect demand of their supplies.

Businesses that are dealing with zero rated and out of scope supplies, VAT will not have any major impacts on them except the common impacts as mentioned above.

(b) Impact of VAT on individuals

Individuals who are buying standard rated goods and services for consumption purposes, they would be liable to pay five per cent VAT, and Individuals who are buying VAT exempt goods and services, most probably, they would be liable to pay higher prices. Such purchases will have a negative impact on their purchasing power. However, if they are buying zero rated or out of scope supplies, they wouldn’t be liable to pay any VAT and/or increased price which will not have impact on them.

(c) Impact of VAT on the government

Globally, taxes are the major source of revenue for the Governments and Governments across the globe spend these taxes for the welfare of the public. In the same way, VAT has become a source of income for the Government of United Arab Emirates (UAE) and UAE Government spends this income for the welfare of the public by developing world-class infrastructure, hospital, roads, medical facilities etc.

Moreover, VAT has reduced reliance on the oil-generated money and led to diversified sources of income for the Government which is a sign of healthy and matured economy.

(d) Impact of VAT on the economy

I am always saying, this is not only introduction of VAT, but the documentation of the whole economy. Government will be able to know the sales and purchases of each registered supplier in the supply chain, which would be helpful for the Government to take decisions.

Moreover, standard rated and exempt supplies of goods and services will make supplies more expensive and it will push the inflation rate up based on average supply of standard rated goods and services in the market.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above is not an official, but a personal opinion of the writer. For any queries/clarifications, please write to him at compliance@kresscooper.com.