Introduction of VAT in Gulf Cooperation Council & Impact on Indian ICT Industry
Value Added Tax (VAT) is expected to be introduced in the six countries - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates, which form the Gulf Cooperation Council, by January 1, 2018. GCC UAVAT (Unified Agreement on Value Added Tax) is aimed at ensuring that VAT is introduced in the GCC, in a unified fashion. Towards the implementation of VAT across the GCC, the Unified Agreement for VAT has been published to provide the framework for the operation of VAT across the GCC. Each GCC member state will implement the framework through legislation and other instruments. This is reason for companies operating in the Middle East to put in place or further their VAT implementation plans.
What is VAT?
Value added tax or VAT is an indirect tax, which is imposed on goods and services at each stage of production, starting from raw materials to final product. VAT is levied on the value additions at different stages of production. It is a tax on consumption, paid by the end consumer. The public therefore, need to be made aware of the taxation system. Hence, awareness programmes are being planned to inform the public.
Challenges in implementation of VAT
Authorities should consider the practical challenges around the introduction of VAT. Surveys in the GCC have revealed that many businesses don’t have adequate accounting systems to deal with VAT. Many businesses also lack the basic knowledge of how a VAT system operates; therefore considerable investment and training will be required and all of this will come at a cost.
It has been confirmed that basic food and other consumer commodities, medicines and medical supplies will be exempt from VAT. The list of exemptions signals a clear intention on the part of the GCC authorities to temper the mildly regressive nature of VAT. The standard VAT rate of 5% has been agreed by all member states of the GCC, and will be applied on goods and services (e.g. food, consulting services, maintenance works etc.) that are not VAT exempt or zero-rated. The expected Federal VAT Law will subject a number of specific transactions to the zero rate or designate them as exempt from VAT, meaning VAT will not be accounted for on these supplies.
Guiding principles of VAT
VAT is expected to be charged at 0% for the following supplies:
* Exports of goods and services to outside the GCC;
* International transportation, and related supplies;
* Supplies of certain air, sea and land means of transportation (such as aircrafts and ships);
* Certain investment grade precious metals;
* Newly constructed residential properties;
The following categories of supplies are expected to be exempt from VAT:
* Some financial services (specified by the VAT Executive Regulations);
* Residential properties;
* Bare land; and
* Local passenger transport.
Any business that is required to be VAT registered and charge VAT from January 1, 2018 must register for VAT purposes, in the manner specified by the Federal Tax Authority, prior to that date. The Government is intending to open VAT registrations from the third quarter of 2017 on a voluntary basis and from the final quarter of 2017 on a compulsory basis.
In order to determine which businesses must be VAT registered, a VAT registration threshold shall apply for all UAE-resident businesses:
* A business must register for VAT if they make taxable supplies or imports that exceed the mandatory registration threshold of AED 375,000.
* A business may choose to register for VAT voluntarily if their taxable supplies and imports are less than the mandatory registration threshold, but exceed the voluntary registration threshold of AED187, 500.
* A person may register voluntarily if their expenses exceed the voluntary registration threshold (e.g. start-up businesses with no turnover).
* Exempt supplies and supplies outside the scope of VAT are not used in calculating the VAT registration thresholds.
No threshold applies to non-resident businesses but if they make taxable supplies within the UAE, they will be required to register for VAT (e.g. maintenance works on a building located within the UAE). However, in circumstances where any other UAE resident business is responsible for accounting for VAT on that supply (e.g. self-assess VAT under the reverse charge mechanism), the VAT registration shall not be required.
Impact on organizations
A corporation tax would be more complex to introduce and probably more of a long-term play, but in essence shareholders’ returns would decrease as the government takes a slice of the wealth they create. Salaries are a large part of the operating expense of most organisations in the region, and therefore annual increases in salaries may be scaled back. Additionally, costs of goods and services may increase to boost the top line so companies can hold the bottom line steady.
Impact on employees / consumers
The impact depends on many factors, such as how and where any tax is applied, as well as the overall rate of tax. The introduction of taxes would have a negative effect on discretionary spending and the ability of people to save money.
In a country where expatriates make up such a large proportion of the workforce, many who feel strongly enough about it might choose to return to their home countries.
ICT Opportunities in India due to VAT in GCC
Given that the GCC will not remain a tax-free haven anymore, once VAT is implemented, Indian IT companies operating in GCC, executing chunk of their projects there, might re-think their strategy and may move a significant amount of business back to India.
This will also be a time when IT companies, operating in GCC are likely to face cash flow issues and hence look beyond GCC to explore other markets like Africa that were hitherto under-explored. India, being a major supplier of quality workforce, as well as, home to valuable investors may see a change for the better. Potential employees may remain in India for better opportunities, when they don’t see a substantial tax benefit and parallel rise in cost of living, due to VAT in GCC and investors too may shift their focus, back on the Indian ICT opportunities.
Chairman, Managing Director & Chief Executive Officer
Octaware Technologies Limited
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