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.
- The first step is to find out the threshold limits of VAT implementation in the business. The business should register in advance if it is anticipated to cross the threshold limit for mandatory registration in near future.
- Analyze your business needs and where you are paying Input VAT and where you should collect Output VAT.
- Establish a clear line of communication between you and your buyers and suppliers. Ensure your long term agreements properly document the responsibilities regarding tax liabilities to be borne by the business, its buyers and suppliers.
- Educate your staff on the implementation and usage of the VAT.
- Designing a new VAT compliance checklist.
- Ascertain the potential impact of VAT on 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:
- Map the process and transactions where the system of VAT will impact.
- Check the ERP system used by the business is adaptable to your business specific VAT needs. If not, reconfigure the systems.
- Map out the legal impact of VAT on your business.
- Preconfigure Input tax credit allocations in your system to help in raising an invoice for the price which is inclusive of VAT and specified the details are per the requirements under the law.
- Check whether correct updating system is in place to apprise the enterprise automatically of the changes in the VAT implementation.
- As VAT works on a transactional level, ensure the records generated is verified and compliant with the VAT rules.
- Seek professional legal and tax advice for proper implementation of VAT procedure and rules.
After the implementation of the VAT system in the business, the business has to keep up with the following requirements:
- Keep track of the statutory compliances required to be done,
- Maintain VAT accounting with the regular accounting functions of the business,
- Update VAT Master Data of all the vendors,
- Reconcile vendor VAT data for Input credits,
- Compute the eligibility for Input credit,
- Compute VAT final liability,
- Aiding in the preparation of MIS reports,
- Filing VAT in an appropriate manner,
- Updating the system to accommodate the changes or updations in the VAT legislations,
- Ascertain cash flow and organize them in a manner where the business does not feel the pinch of a restricted cash flow.
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:
- The supply of some financial services (clarified in VAT legislation);
- Residential properties;
- Bare land;
- Local passenger transport
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:
- Exports of goods and services to outside the GCC;
- International transportation, and related supplies;
- Supplies of certain sea, air and land means of transportation (such as aircrafts and ships);
- Certain investment grade precious metals (e.g. gold, silver, of 99% purity);
- Newly constructed residential properties, that are supplied for the first time within 3 years of their construction ;
- Supply of certain education services, and supply of relevant goods and services;
- Supply of certain Healthcare services, and supply of relevant goods and services.
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.