06 Jun VAT TECH
Are You Ready For VAT IMPACT ?
There is little time left for VAT compliance, with companies, even large ones, set to face an uphill task. “A lot of businesses are not prepared for VAT. People do leave things for the last minute since they have a lot of other pressures.
Businesses need to have an implementation plan in place so that on day one, they can hit the ground running. Companies need to ensure sales staff know what is happening and have the training to deal with customer queries. Their accounting processes and IT systems must be able to capture and report VAT accurately and produce invoices with all relevant information and can deal with things like discounts, refunds and returns.
“Small companies will require not less than three to five months to implement basic software upgrades. For big companies, this could take years,”
VAT is levied on sale of goods and services and paid by producers to the government, the actual tax is levied from customers or end users who purchase these. Thus, it is an indirect form of tax which is paid to the government by customers but via producers of goods and services.
Calculation of VAT:
VAT is actually calculated as the difference between input tax and output tax
VAT = Output Tax – Input Tax
Where output tax is the tax received by the seller for sale of his goods and services and input tax is the tax paid by the seller for raw materials required to manufacture his goods and services.
Suppose Mr. X owns a restaurant and spends AED 50,000 towards obtaining raw materials. Input tax is 5%, so input tax becomes 5% of AED 50,000 = AED 2,500
Now after selling the food made by using the purchased raw materials, Mr. X was able to make AED 1,00,000. Supposing 5% output tax, output tax becomes AED 5,000
So, final VAT payable by Mr. X comes out to be AED 5,000 – AED 2,500 = AED 2,500
Process of VAT Registration:
VAT registration is mandatory for enterprises that make a turnover of more than Dh375,000 by selling goods and services. All such enterprises are required to register. Registering for VAT is necessary for enterprises in order to start paying VAT. The companies concerned can file their declaration statements electronically after responding to all the questions raised on the Ministry’s website, with the threshold for VAT registration put at Dh375,000 as per the ministry’s announcement.
When to get registered:
UAE businesses will be able to start VAT registration in Q3 2017 and it is compulsory to be registered by Q4 2017.
Possible Process of VAT Collection:
The process of collection of VAT can be safely categorized into two broad heads based on the method of collection of value added tax.
- Account-based collection of VATUnder the account based method of collection, sale receipts are not used, instead tax is calculated on the value added. Value added is calculated as the difference between revenues and allowable purchases. Most countries do not use this method of computing and collecting VAT, however, Japan still uses this way for tax collection.
- Invoice-based collection of VATUnder the invoice-based VAT collection, sale receipts or invoice is used to compute the corresponding VAT. Traders when they sell their goods and services offer invoice containing separate details of VAT collected. Most countries in the world today use the invoice-based method of VAT collection.Another way to categorize VAT collection is to classify it based on the timing of collection.
- Accrual-based collection of VAT
Accrual based collection matches the revenue with the time period during which it is earned and matches the cost of raw materials and expenses to the time period during which they were made. This method is extremely complicated as compared to the cash-based collection of VAT. However, it also throws substantial light on information about any business.
- Cash-based collection of VATCash-based accounting is simpler than accrual-based calculation. Emphasis is laid on the cash that is being handled instead of whether all the bills are paid. Whenever payment is received, that date is recorded as date of receipt of funds.
Every business will need to maintain proper books of accounts and will need to incorporate VAT into their accounting systems. They will need to keep accurate records to demonstrate that they have correctly applied the VAT rules.
Information System will have to take an important role in this. Accounting software needs to comply for ease of business flow and maintain a stringent legal compliance. Every organization should properly educate their employees, well in advance before VAT is implemented. An implementation of VAT law would require a complete revamp of present practices and will insist on a higher degree of financial transparency and accounting discipline.
The writer is Allelife’s VAT Services Team Leader. Views expressed are to provide awareness of system revamp.