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How Does VAT Will Impact On Your Business?

Planning And Analysis

VAT is a tax which infuses itself with the operations of the business. It is not a tax that is paid at the end of the year or after deduction of profit or loss calculation. As it becomes an integral part of purchase or sale of goods, there arises a need for careful planning and analysis of your business.

As VAT is an inclusive tax, it is better to assess your financial situation once again. Even though only the difference amount is payable to the Government; check if there should be any pricing revisions or commercial arrangements required to be made to factor in the taxation cost for getting the similar revenue flow.

Review Of Systems

Check whether the existing IT systems are compatible with the function of VAT. If not, there should be a reconfiguration process implemented to funnel those changes into the system. Many enterprises would have to reconfigure their system to not only for VAT related documentation e.g. details to be mentioned in the invoices, timelines for maintaining records etc. but also for ensuring compliance in terms of calculation and filing of returns and payments to be made to the Government. Changes are to be implemented not only in the IT and ERP process but also in the workforce.

The business can follow these steps to bring about a system change:

After the implementation of the VAT system in the business, the business has to keep up with the following requirements:

Understanding The Rates

It is crucial to understand the difference between the exempt, zero-rated and standard rate supplies as they have a huge impact on the VAT liability of the business.

Exempt supplies: These supplies are not subject to VAT. The supplier of these supplies is not allowed to deduct input tax for incurred in producing and delivering these supplies. Article 46 of the Federal Decree – Law no (8) of 2017 of U.A.E. deals with exempt supplies. Basic necessities e.g. healthcare, education etc. are generally kept as exempt supplies from taxes. In U.A.E., following supplies are kept as exempt:

Zero-rated supplies

The applicable rate of tax on these supplies is zero. However, the supplier of these supplies is allowed to claim the credit of input tax paid in process of producing and delivering these supplies. The states can decide about the supplies they want to keep zero-rated for the purpose of the tax. Article 45 of the Federal Decree – Law no (8) of 2017 of U.A.E. deals with zero-rated supplies. In U.A.E, following supplies are zero-rated:

Standard supplies

The supplies subject to the standard rate of tax in the state are included in this category, In GCC countries, the standard rate is 5%. Similarly, as in case of zero-rated supplies, the supplier can claim the credit for input tax paid in producing and delivering these supplies.

They should carefully evaluate its supplies and categorize supplies and assign the VAT rates according to the classifications. Even the ERP systems are to be tuned to this adjustment for effortless transactions and their related billing. The business should use a platform that provides clear and concise differentiation between the supplies. While billing zero rated and standard rated supplies or exempt and standard rated supplies, specific care should be taken to apply the specified rates for each product. The accounting software should be set to identify these differences, but the supplies classification of these supplies must be done manually by the company accountants.

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