INTRODUCTION OF VAT IN GULF COUNTRIES

[Dr. Sanjiv Agarwal]

Yet another tax reform in the world in Gulf Countries is taking place. VAT is being introduced for the first time in Gulf countries as recommended by Gulf Cooperation Council (GCC).           

Genesis

The GCC group of nations have historically worked together in designing and implementing new public policies as they recognize that such a collaborative approach is best for the region, therefore they framed a VAT agreement for all the member states.

GCC VAT AGREEMENT is a framework agreement signed by all six GCC countries:

• Broad framework that mainly states provisions for intra GCC trade
• Gives countries discretion to choose treatment in certain sectors where it does not affect intra-GCC trade
• Mutual agreement on some provisions such as the standard rate of VAT and the registration threshold.

Applicability

Value Added Tax (VAT) will be applicable to all member states of the Gulf Cooperation Council, namely:-

• The Kingdom of Saudi Arabia(KSA)
• The United Arab Emirates(UAE),
• The Kingdom of Bahrain,
• The Sultanate of Oman,
• The State of Qatar, and
• The State of Kuwait,

The United Arab Emirates (UAE) is a Constitutional Federation of seven Emirates, namely-

• Abu Dhabi,
• Dubai,
• Sharjah,
• Ajman,
• Umm Al-Quwain,
• Fujairah, and
• Ras Al Khaimah

What tax?                             

VAT is an indirect tax on the consumption of goods and services not exempt from tax. It shall be charged and collected by a taxable person and remitted to the tax authority. A taxable person is a person, persons or entity that carries out an economic activity that requires them to be registered for VAT.

VAT is levied at each stage in the supply chain and is collected by businesses on behalf of the Government. VAT is ultimately incurred and paid by the end consumer.

From when?

For UAE and KSA 1^st January, 2018 is the go-live date for VAT and other GCC countries have time from January 1^st , 2018 to January 1^st, 2019 to implement VAT.

Registration for VAT will commence prior to implementation date. In UAE, Registration has commenced w.e.f. 1.10.2017.

What tax laws?

There will be three Federal laws applicable in UAE and KSA:

• Executive Regulation of Federal Law on Tax Procedures
• Federal Decree Law on Value Added Tax
• Federal Decree Law on Excise Tax

Similar laws will be in force in other countries.

GCC – VAT Rates

GCC VAT Rate has been pegged at 5 percent in all GCC nations which may be considered low (may be like introductory offer).

India has kept GST rates under different slabs, i.e., 5%, 12%, 18% and 28% plus cess. World average is 16.4% whereas OECD average is about 18 – 19% Asia Pacific Nations have on average of 9.88%.

What businesses should do now?

Following actions should be initiated to prepare a business, accounting and reporting systems, staff, suppliers and customers for the new VAT regime:

• Preparation of different scenarios for the application of VAT and cost of implementing the same.
• Continually track policy development regarding VAT and update prepared scenarios
• Understand the key areas of impact in business and plan for adversely affected areas.
• Cash flow impact analysis as VAT is paid on an accrual basis
• Analyse the capabilities of existing accounting systems to deal with VAT
• Contract reengineering and documentation
• Analyse and understand transitional issues.
• Evaluate the impact of new tax on pricing of any supplies.
• Plan for the training of existing staff and the recruitment of skilled resources/outsourced agencies
• Prepare the implementation road map and align relevant teams
• IT preparedness and software upgradation
• Inventory management
• Working capital reassessment and management
• Due diligence of existing system and procedure

VAT in gulf countries is likely to be simple as compared to Indian GST as there will be no issues on account of migration from old tax regime, transitional provisions, no place of supply confusions as it is a national VAT and these countries are already on online / electronic mode of doing business.