Understanding Value Added Tax (VAT) and Its Impact on Corporate Taxation

alue Added Tax (VAT) is a complex tax. It can be difficult to understand. A Value Added Tax (VAT) is a consumption tax. It is measured on the value added in each production phase of a good or service. Every business along the value chain has a tax credit for the VAT before now paid. The noteworthy thing is businesses are permitted to reclaim VAT paid on their purchases known as VAT reclaim. In this article, we will understand more about the Value Added Tax (VAT) and Its Impact on Corporate Taxation.

What is Value Added Tax (VAT)?

VAT was presented in the UAE as a fragment of the GCC VAT framework. The standard rate of VAT is 5% in the UAE. The noteworthy thing is it is comparably smaller than other countries. Most of the goods and services fall under the VAT. Some of the goods and services enjoy specific exemptions and zero-rated supplies benefits. Such Exempted items typically include;

  • Basic food items
  • Healthcare services
  • Residential rents
  • Local transportation

Zero-rated supplies are taxable at a the rate of 0%. These includes certain food and beverage exports, global transportation services, and informative services.

The main obligation for Businesses working in the UAE is that they have to register for VAT if their annual turnover surpasses AED 375,000. 

There is also available Voluntary registration for businesses with a yearly turnover between AED 187,500 and AED 375,000. Businesses must obey all the VAT protocols upon registration such as;

  • Maintaining proper records
  • Issuing vat invoices
  • Submitting periodic VAT returns

Remember that compliance is very important and fundamental to avoid consequences and legal penalties.

The key points related to VAT are;

  • Value-added tax (VAT) is added to a product at every phase of the supply chain. This phase is where the value is added to it.
  • It usually has numerous rates for diverse groups of goods and services 
  • It aims to tax consumption spending instead of income, returns or wealth
  • VAT is intended to be a wide-ranging tax on ultimate domestic consumption
  • It helps to avoid double-taxation through its credit mechanism

How VAT Impact on Corporate Taxation?

The prominent impact of VAT implementation on corporate taxation can be easily understand by the following factors;

  1. Impact on Cash Flow

The major impact of the VAT implementation is the cash flow of businesses in the UAE. Companies are obligatory to charge VAT on their goods. But businesses have also an opportunity to reclaim VAT paid on qualified business expenses. Good cash flow management is very important to safeguard adequate funds. It also helps to enhance working capital.

  1. Small and Medium Enterprises (SMEs)

VAT implementation has a supreme impact on Small and Medium Enterprises in the UAE. These SMEs often have partial funds and financial limitations. Small and Medium Enterprises should enthusiastically pursue help from Farahat & Co…. to handle their;

  • VAT requirements
  • Benefit from available support
  • Diminish the impact on their operations

The noteworthy thing is that UAE government has planned workshops, sessions, and training programs to instruct Small and Medium Enterprises. These sessions or training programs helps SEMs to understand VAT rules and compliance requirements. To handle complexities of VAT, SMEs must take participation in these programs. They will definitely help to improve their understanding of VAT and its impact on their corporate taxations.

  1. Accounting and System Modifications

The implementation of VAT needs businesses to make modifications to their accounting systems. This is a main impact on corporate taxations. They have to record and keep track of VAT;

  • Purchases
  • Expenses
  • Segregate input
  • Output VAT

Businesses must make precise VAT invoices. Businesses can handle it precisely by Investing in robust accounting software. Professional firms such as Farahat & Co. can help businesses uphold compliance, modernize processes, and guarantee precise record-keeping.

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  1. Pricing strategies of the businesses

VAT has also a great impact on the pricing strategies of businesses in the UAE. Companies have to choose whether to suffer the VAT cost or get it from the customers. 

  • By suffering the VAT cost lessens the company’s profit margins.
  • By getting VAT from customers could affect demand and attractiveness

Due to this factor, businesses have to analyses their pricing strategies to strike an equilibrium between effectiveness and market placement.

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VAT is not just a legal requirement, it is a chance for businesses to improve their competitiveness, and contribute to the financial growth of the UAE. By following the above considerations, businesses or SEMs must peruse for professional guidance from Tax consultant Dubai … they will help to stay well-versed about VAT progresses and the important strategies to navigate the developing VAT landscape effectively.

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