18 Jan
What are the major impacts of VAT
In this article, KT has assessed the impact of VAT on businesses, individuals, government and overall economy
Since VAT is a consumption and multistage tax, so it has an impact on each player of the supply chain and individuals, who are buying the goods and services for consumption purposes. It has an effect on the economy and it is a major source of revenue for the government. In this article, we have assessed the impact of VAT on businesses, individuals, government and overall economy.
(a) Impact of VAT on businesses
There are some common impacts of VAT on each business and some specific impacts, based on the categories of supplies.
(i) Common Impacts of VAT on Businesses
Whenever VAT is being introduced in any country, every business is required to have an impact assessment to assess the impact of VAT. Based on the impact assessment, they will be able to know, on which areas of business VAT will have an impact and what are they required to do to implement it properly. Like based on the impact assessment, they will be able to adopt the proper tax position of their supplies. Businesses will be able to know eligibility of VAT registration, impact on their working capital and system, required changes in the processes, compliance requirement etc.
Based on the impact assessment, businesses are required to implement the VAT properly which requires changes in the system, tweaking existing processes, training to the employees, communication with the suppliers and customers etc.
Once the VAT is up and running, businesses are required to submit the VAT Return, and while submitting the VAT returns, businesses cannot claim input tax on some purchases/expenses like expenses for throwing parties, expenses related to Car which can carry less than 10 people and is available for personal use, expenses related to the dependents of the employees where companies have no legal obligations, non-business expenses etc. All such blocked input tax will become cost of the businesses.
Businesses requires work force to comply VAT so it will lead to increase in administration and hiring cost. Sometime, companies are required to hire consultants which will lead to increase the consultancy charges.
(ii) Specific impact of VAT on businesses
So far as specific impact of VAT is concerned on businesses based on the categories of supplies, the industries that are dealing with standard rated supplies, VAT will impact the purchasing power of their customers and it will have a negative effect on the demand of their supplies. VAT registered companies which have longer payment terms with the customers and shorter payment terms with the suppliers, VAT will have adverse impact on their working capital, and vice versa.
Businesses which are dealing with the exempt supplies, like local passenger’s transport, banks and financial institutions offering margin-based services, suppliers of bare land etc will not be able to claim related input tax and such input tax will become their cost which will lead to increase in the operating cost of the business. Most probably, such businesses will pass on this cost to their customers by increasing the prices of their supplies to achieve their targeted margins so it will have a negative impact on the purchasing power of their customers which will affect demand of their supplies.
Businesses that are dealing with zero rated and out of scope supplies, VAT will not have any major impacts on them except the common impacts as mentioned above.
(b) Impact of VAT on individuals
Individuals who are buying standard rated goods and services for consumption purposes, they would be liable to pay five per cent VAT, and Individuals who are buying VAT exempt goods and services, most probably, they would be liable to pay higher prices. Such purchases will have a negative impact on their purchasing power. However, if they are buying zero rated or out of scope supplies, they wouldn’t be liable to pay any VAT and/or increased price which will not have impact on them.
(c) Impact of VAT on the government
Globally, taxes are the major source of revenue for the Governments and Governments across the globe spend these taxes for the welfare of the public. In the same way, VAT has become a source of income for the Government of United Arab Emirates (UAE) and UAE Government spends this income for the welfare of the public by developing world-class infrastructure, hospital, roads, medical facilities etc.
Moreover, VAT has reduced reliance on the oil-generated money and led to diversified sources of income for the Government which is a sign of healthy and matured economy.
(d) Impact of VAT on the economy
I am always saying, this is not only introduction of VAT, but the documentation of the whole economy. Government will be able to know the sales and purchases of each registered supplier in the supply chain, which would be helpful for the Government to take decisions.
Moreover, standard rated and exempt supplies of goods and services will make supplies more expensive and it will push the inflation rate up based on average supply of standard rated goods and services in the market.
Source:https://www.khaleejtimes.com/business/what-are-the-major-impacts-of-vat
06 Nov
Does serving a notice period come under VAT’s coverage?
An employment contract between an employee and employer is outside the scope of VAT. This is a universally recognized principle and always mentioned in the VAT legislation.
Although the UAE VAT Law does not specifically define employment contracts as outside the scope of VAT, the Taxable Person Guide clarifies this. Under the UAE VAT Law, a supply must be made by a person conducting business – i.e., any regular or ongoing activity conducted with a degree of independence and continuity. Due to the requirement that a business must be an independent activity, the activities of employees are not treated as being in the course of business.
As such, employees are not liable to charge VAT on their remuneration or salary. Having said that, there are certain transactions between the employee and employer that occur outside the employment contract.
Liable for recovery
An organisation may recover from an employee: visa charges for dependents, personal mobile expenses, insurance of employee dependents, vehicle usage charges, etc. We will discuss the VAT treatment of recoveries made by organisations in lieu of employees not serving their full notice period.
When an employee resigns, in the normal course of business, the employee must serve a notice period, as may be mutually agreed in the employment contract. During the notice period, he or she should be present on all the working days.
In certain situations, the employee may not want to serve all or part of the notice period. In which case, either the employer waives off the requirement of servicing the entire notice period, or the employee may be asked to pay an amount equivalent to the salary of the unserved notice period. The question that arises is whether the money received by the organisation for the unserved notice period constitutes consideration for a ‘supply’?
Compensation
Article 119 of the Employment Law provides that if the employer or the employee has failed to serve notice to the other party for termination of the employment contract, the party obliged to serve the notice period shall pay to the other party compensation known as ‘compensation in lieu of notice’ equal to the pay for the unserved notice period. Such compensation is payable even if such failure to notice or such reduction of the period does not cause damage to the other party.
From a VAT perspective, one may be tempted to refer to the VAT Public Clarification on VAT Treatment of Compensation-type payments issued by the Federal Tax Authority (FTA). The Guide clarifies that:
- A fine or penalty may be imposed for contravening the terms of an agreement.
- Where a person has caused damage to another person, the person causing damage may be required to make a payment to compensate for such damage or loss.
The Guide provides that fines and penalties are not a consideration for any supply, and therefore outside the scope of VAT. Also, where the payment is compensation for breaching pre-existing terms of a contract, it is unlikely to be a consideration for a supply and therefore outside VAT’s scope.
If one were to closely read the provisions of UAE Employment Law, the compensation is payable even if such failure to notice or such reduction of the period does not cause damage to the other party. Therefore, one could argue that compensation in lieu of an unserved notice period is not a fine or payment in lieu of damages. It is to be seen if the FTA will refer to the provisions of employment laws to evaluate whether a payment is a fine or a payment in lieu of damages.
One may note that the UAE VAT Regulations define ‘Supply of Services’ to include cessation or surrender of a right. In the case of notice pay recovery, one may argue that the organisation is giving up its right to an employee serving the notice period, in lieu of consideration, and hence the same would be taxable at 5 per cent.
Not swayed by descriptions
In considering whether a payment is a consideration for a supply or is in the nature of penalty, it is important to ignore the labels or titles given to a payment. A description of a receipt as ‘penalty’ or ‘compensation in lieu of damages’ will not prevent the nature of the payment from being considered for a supply.
The VAT treatment of recovery of notice pay must be considered in conjunction with the rights of the employer, employee, employment contract and the local labour laws. There may not be a universal answer, and each situation must be evaluated on its own facts.
Source:https://gulfnews.com/business/analysis/does-serving-a-notice-period-come-under-vats-coverage-1.1636013253767
05 Nov
India cuts taxes on petrol, diesel ahead of Diwali to boost economy
The Indian government on Wednesday reduced taxes on petrol and diesel in a bid to improve consumer sentiment, as Asia’s third-largest economy recovers from the shocks of severe lockdowns to control the spread of the coronavirus.
The excise duty on petrol has been reduced by Rs5 ($0.0671) per litre, and that on diesel by Rs10 ($0.1342) per litre, the government said in a statement.
Following the federal move, at least ten states ruled by Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP), or his allies, said late Wednesday they would go further and reduce local fuel taxes by as much as Rs7 a litre.
The tax relief comes on the eve of the Hindu festival of Diwali, which marks the beginning of a busy festive season in India, typically marked by increased consumer spending.
Recent months have witnessed a steady growth in consumer spending in India, with a relaxation on curbs on travel and business operations due to a dip in the number of coronavirus cases.
But high fuel prices have been hurting the margins of corporates as well as farmers, who contribute a significant chunk to the economy. The cut in fuel taxes is likely to come as a boost to manufacturers and farmers.
“Given that inflation expectation is building up, there was a need to relook at the tax component,” said NR Bhanumurthy, economist and vice chancellor at the Bengaluru-based BR Ambedkar School of Economics. “This will cool down the inflation expectation to some extent, which will augur well for sustained GDP (gross domestic product) growth.”
Modi’s government has faced increasing criticism from its main opposition Congress party over rising fuel prices in recent weeks. In a country where a majority of the people live on less than $2 a day, taxes make up a large component of fuel prices: a litre of petrol comes at Rs110.04 while diesel comes at Rs98.42 in New Delhi.
Before the cut to prices announced on Wednesday, taxes made up about 52 per cent of the price of petrol and about 47 per cent of that of diesel.
Spiking global oil prices have pushed up the retail prices of petrol and diesel to a record high this month in India, which is the world’s third-biggest oil importer and consumer and ships in about 85 per cent of its oil needs from overseas.
Global oil prices surged to $86.40 a barrel on October 26 – the highest since October 2014 – battered by the hit to economies from the Covid-19 pandemic, although they since eased to about $82.5 per barrel.
Source:https://www.khaleejtimes.com/economy/india-cuts-taxes-on-petrol-diesel-ahead-of-diwali-to-boost-economy
18 Oct
UAE’s sole establishments and family business owners have a VAT status to tackle
A number of family business owners in the UAE have multiple business interests out of which some are structured under a holding company format while others could be sole proprietorships/establishments of the family members.
Such non-company establishments are kept when the family members have businesses that are independent of the overall family business, leading to alienation of their personal interests. We look at two issues that have emerged for sole establishments in the last three plus years since VAT was introduced.
First, the separate VAT registration granted to independent sole establishments and, second, the issue of VAT grouping of such sole establishments with the llc entities of family business. At the time of the introduction of VAT, the UAE Federal Tax Authority allowed a large number of individual owners to VAT register each of their sole establishments as separate entities and given separate Tax Registration Numbers (TRNs).
Do way with multiple TRNs
The FTA later clarified that sole establishments are not independent of their owners and, consequently, there shouldn’t be separate TRNs issued to them. As part of one ownership, they are supposed to be given one TRN.
The FTA clearly mentioned that where separate TRNs have been issued to different sole establishments, the owner need not do anything on his own. Rather, the FTA will itself pick up such cases and instruct the owner to carry out the needed amendments.
It has been observed that the FTA advises owners having multiple sole establishments to retain a single TRN for all entities and de-register the rest. This is specifically seen in VAT registration amendment applications where the FTA has sought a declaration from the owner to confirm if he or she has other sole establishments.
A cumbersome process
Two points emerge from this issue. First, should owners wait for the FTA to come back and instruct them to make amendments to their VAT registrations, specifically when they know that such request would anyways come when any application for TRN amendment is filed with the FTA?
The second – and bigger – issue that would arise from getting one TRN for all the entities and de-register the rest is the hassle of informing vendors and customers of the new TRN (for all sole establishments), making amendments in the banking channels, potential non-recovery of VAT on invoices the vendors may issue using the old TRN. An elaborate way would have to be entered into to ensure no disruption of work.
The FTA in 2018 had also allowed the sole establishments to become part of the VAT group. Technically – and as clarified by the FTA in the VAT Guide – individual owners are natural persons and not legal persons, and natural persons are not allowed to be VAT grouped.
Legal vs. natural
So effectively, some of the sole establishments that are owned by individuals – and therefore to be treated as natural persons – have inadvertently become a part of the VAT group with other llc entities. It is possible that some of the sole establishments that are part of the VAT group could be non-functional and may not have any business activity.
In that case, there is a strong probability of the FTA imposing a penalty for continuing to have a non-functional entity registered for VAT. The imminent need for family business groups is to assess if any sole establishments are still part of the VAT group and, if yes, de-register and register it as an independent sole establishment.
While registering it as a sole establishment, it is important to ensure that the owner does not have any other sole establishment that could already be VAT registered. Similarly, the possibility of converting the sole establishments into llcs could also be explored to avoid having all the sole establishments under one TRN.
Source:https://gulfnews.com/business/markets/uaes-sole-establishments-and-family-business-owners-have-a-vat-status-to-tackle-1.82941024
