PORTFOLIO | Road To VAT
A
re UAE enterprises and firms VAT ready? It’s highly possible — though not inevitable so
far — that companies and businesses in the UAE will soon live under a radically different tax system — value-added tax or VAT by 2018. Recently, the Undersecretary at the UAE’s Ministry of Finance Younis Haji Al Khouri reportedly told to media that the GCC countries have agreed on certain key issues regarding the implementation of VAT. “We have agreed to exempt approximately 94 [mainly food] items. We also agreed to apply zero tax on healthcare, education and social services sectors,” media reports cited Khouri as telling reporters.
Earlier in July last year, the UAE’s
Ministry of Finance announced that progress has been made in drafting the UAE VAT law, including
tax systems in the GCC is that there is no personal income tax, though countries in the region distinguish between corporate taxes on oil and non-oil companies, according to a report by IMF staff. Nevertheless, the various taxes that exist in GCC countries on non-oil activities are all characterized by very low rates and narrow bases and consequently raise little revenue. Overall, the share of tax revenue to GDP averaged about a meagre 1.6% between 2012-14. Countries are therefore very reliant on revenues from hydrocarbon exports and from investment income on government assets.
Why VAT? VAT is probably the best tax ever invented. One of the most pressing reasons making the case for VAT solid in the Gulf is that the existing tax
EFFORTS to introduce taxes in the region go back to the 1950s when Saudi Arabia introduced personal income, capital gains, and corporate taxes
adopting the draft common VAT law framework agreed with the GCC countries. The development of tax systems
in the UAE and the wider GCC is however not new and it has been largely shaped by the role that oil exports and revenues have played in financing government budgets. In fact, efforts to introduce taxes in the region go back to the 1950s when Saudi Arabia introduced personal income, capital gains, and corporate taxes in 1950 on both nationals and non-nationals. Within six months of introduction, however, the tax law was reformed to exclude nationals and in 1975, income taxes on foreigners were suspended due to high oil revenues and the need to recruit expatriates to help build infrastructure and develop the economy.
One of the key characteristics of
systems are limited and do not meet rising budget financing needs in the context of a potentially prolonged period of low oil prices, says IMF staff report. The UAE’s efforts towards diversifying revenue base through measures such as VAT is also backed by recommendations from international organizations such as the IMF that has recommended VAT should be set at approximately 5%. ‘The VAT is an ideal revenue instrument for the GCC,’ notes a report by IMF staff published in November last year. It added that if designed well, the VAT could generate as much as 1.5 to 2% of GDP (or about 2.5 to 3.5% of non-oil GDP) in revenue in the GCC even with relatively low rates. This would add significantly to what the Gulf region currently generates in non-oil tax revenue. In addition, the VAT is relatively simple to administer and
February 2016 |
www.wealth-monitor.com
How VAT is Entered in Accounting Books?
Since VAT is charged on both purchase and sale of goods, a record is maintained by a firm of every penny of input tax paid (tax on purchase from supplier) and output tax collected (tax reclaimed on sale to customers). When a retailer buys goods from its suppliers, it has to pay both purchase value and VAT input.
Here is the example of how this input tax is recorded in the journal:
Purchase Account Dr. (Value of Purchase)
VAT Input Account Dr. (VAT on Purchase)
Cash or Bank or Name of Creditor Account Cr. (Value of Purchase + VAT input)
Similarly, when goods are sold (either from a supplier to a retailer or from retailer to a customer) the seller has to recover both sale price and an output tax collected at the time of sales to the customer.
Here is the example of how this output tax is recorded in the journal:
Name of Customer Account Dr. (Value of Purchase + VAT output)
Cash or Bank or
(VAT on Sale)
VAT Output Account Cr.
Sale Account Cr. (Value of Sale)
17 17
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