Why Taxes?
The sharp decline in oil prices in recent years, have substantially affected the revenue of the Government in GCC countries. It has also delayed, various development projects which will again result in increased costs for completion of projects. The subsidies offered on various energy and oil products in the region have also been eliminated in recent past. Removal of these subsidies will reduce the burden of expenses, but it cannot be long-term solution. Revenues need to be generated to keep the growth projects going forward. The Governments of GCC nations understand the immediate need to find out an alternative source of revenues for them for a fiscal sustainability. This resulted in introduction of taxation in the region, which was an alien for many residing in this part of the world.
Introduction
After multiple rounds of meetings of senior officials and advisers of these counties and an extraordinary meeting of ministers of finance of GCC nations held in Jeddah on 16th June, 2016 the treaties between the GCC nations for VAT (Value Added Tax) and Excise tax were approved. These treaties provide a common framework and the basis for the formation of national legislation for the introduction of taxes in all member nations. However, some administrative matters related to intra GCC trade and tax collection mechanism for it, still need to be worked out.
Introduction of taxes will be considerable economic reform in the region, which was tagged as tax free till now. The nations have signaled no income tax on individuals for now. Many industries like healthcare, food, social services and education are exempted. But, the introduction of VAT and Excise Tax will definitely need some preparation of the businesses operating in the region. Kingdom of Saudi Arabia has already confirmed the introduction of VAT with effect from 1st January, 2017 while in United Arab Emirates it is expected to be effective from 1st January, 2018. The rest of the nations in the region shall also implement it very soon.
Value Added Tax (VAT)
VAT is a tax on consumption and it is a popular fiscal tool. It is a the tax on consumption; therefore, the burden of tax will be on the consumer more than on the business. It will achieve the twin objective of tax maker viz. It will not change investment decisions of business and it will generate revenue for government.
VAT is charged by suppliers of goods and services and payable on purchases. VAT is collected by businesses from buyer and they have to file a VAT return to authority after ascertaining the net tax payable or refunded to them, if they have already submitted extra tax to the government.
Business requires getting them registered with the VAT authority for being authorized to collect taxes. In various jurisdictions, minimum turnover limits have been specified, for mandatory registration with VAT authorities. The business having lower turnover can register themselves at their choice. However, it is important to note here that once registered, the businesses are mandatorily required to charge VAT on their supplies and are eligible for deduction on purchases.
Excise Tax
It is again a tax on consumption, putting the ultimate burden on the buyer. It is levied on import of goods and services within the country. It is collected by business on behalf of tax authorities and later submitted to the authority along with excise return. Organizations engaged in import or manufacturing of excisable goods shall comply with regulations issued by Excise authorities in the jurisdiction.
What Business Owners need to Do?
- Check whether your business turnover or activities fall under mandatory registration with the authorities.
- Register your business with the authorities.
- Maintain proper books and records for the collection and submission of taxes specific period of time.
- Maintain a proper record for import of goods and inventory in the warehouse.
- Have proper systems in place to issue tax invoices to buyers.
- Maintain proper documents, books and records for payment of taxes to suppliers.
- File periodic tax returns to avoid penalties for non – compliance.
The Bottom Line
Whether you like it or not, this is now realty and you have to be tax compliant for doing business in this part of the world. The ambitious growth projects of government require sufficient revenues on a sustainable basis and taxes are the most efficient source of revenue for Governments since ages. Governments have already given plenty of time to warm up and prepare yourself to ensure that taxation can be administered properly immediately after implementation. Therefore, the businesses should tighten their belts and start considering what this newly introduced law affects them and take appropriate steps for ensuring compliance with the law.
