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Vat Impact On Company Profit in Dubai, UAE

Since the introduction of Value Added Tax (VAT) on January 1, 2018, in the UAE,  a rate of 5% VAT came into effect. Businesses need to register for VAT to abide by the UAE VAT law.  VAT is a form of indirect tax that infuses business operations and profit. Being registered under the VAT law requires you to prepare and maintain a range of accounts, business and tax records so the government can monitor that your things are going right. The expert auditors, tax specialists, and accounting professionals observe that the implementation of VAT in UAE will instil hugely impact on the growth of the UAE economy and businesses in the long run.

vat impact on company profit uae

Impact of VAT on UAE Company Profit

Vat is not a cost for the company. It acts as a mediator or agent for the government to collect the Vat from the end-users. The administrative and financial challenges posed by VAT may seem stressful in the initial stage, but in the long run, it may help your business become more efficient and profitable. Once Vat collection and payment has planned properly, it’s not going to hit the Profit and loss account of your business. But, if the VAT is not claimed, it will surely hit on the profit.

So, it’s worth keeping an up-to-date implementation strategy to ensure that you’re retaining all the right records and following all the necessary steps to successfully submit VAT returns for this year. Fulfilling your tax obligations will help your business run as smoothly as possible during the transition period.

Importance of VAT Impact study on Company profit 

Because of the new tax implementation, every business organisation has to know what is the actual impact in each area of business cost, i.e. whether in the cost of sales, Administrative expenses, Production Cost, Utility Cost or all taxable purchases, etc., and how a tax associated with every purchase of goods & services will make benefit to the company in terms of zero effect on company cost. Proper allocation and accurate accounting of expenses will mitigate this risk and the company will earn stability in their profit.

It’s important to know the local purchase or imports of goods will reduce the risk of tax purchase. Here, the importance of accounting professional is required, as a proper assessment and professional analyses are more beneficial for the company. 

Because of the introduction of IFRS-15 in Revenue & Contracts, it is recommendable to have a detailed study on changes happened in Revenue booking and effect on profit because of the retrospective effect on the IFRS-15.

Positive impact of VAT on UAE Businesses

Implementation of VAT holds positive impacts on businesses in Dubai and the UAE. The implementation of VAT and its compliance will add more benefits to the UAE business world as a whole and for your business and future profitability levels particularly. Some of the major upsides are discussed below.

The revenue will not only help to steady the economy, but it will also improve the country’s infrastructure, making it easier and less expensive to do business in the UAE.

  • Enhanced infrastructure

The revenue will not only help to steady the economy, but it will also improve the country’s infrastructure, making it easier and less expensive to do business in the UAE.

  • Enhancement to government reserves

The new tax is expected to bring a significant new revenue stream to the UAE government that will help create a stable economy, which will have a positive knock-on effect on local businesses.

  • Non-financial benefits

Tax regulation can bring many non-financial benefits to an economy, like improved liability management, enhancement of government accountability and democracy, faster and more informed decision-making, and reduce the incidence of civil fraud, corruption and waste.

  • Amplified business efficiency

Administering and implementing the VAT will amplify the business by replacing inefficient and out-of-date accounting systems. 

  • Advisory opportunities

The implementation of VAT offers more worthwhile opportunity for entrepreneurs willing to enter into this sector, as there will be more market opportunity for advisory firms/consultants who specialize in VAT terms. 

  • Disseminated costs

The small businesses may be hit by the implementation costs in the beginning, but, in due course, it’s the consumer who is going to suffer by the new VAT laws as it will be charged to the customer through sales channels. So, it won’t affect the bottom-line of your business too much.

Negative Impact of VAT on Businesses in Dubai

Given below are some of the negative impact of VAT on businesses in Dubai. 

  • Bigger costs

The new VAT scheme has increased the cost of the businesses due to the increase in the admin and implementation costs as you have to update IT and internal systems, train your employees in VAT processes to comply with the new scheme, etc. 

  • Changes to business structure

Though some companies may enjoy a significant cash flow, it will be a problem for other companies having more than one business with the same product or services. In order to avoid taxing and paying the VAT twice, you have to bring them together. 

  • Risk of accountability

A VAT-registered business is legally accountable to prepare and keep a range of business records like annual accounts, general ledgers, purchase daybooks, and invoices issued and received, credit and debit notes, etc. for a minimum of five years for the inspection whenever required by the government bodies.

  • Ambiguity about the future

Most of the UAE companies are anxious about the 5% VAT rate as they think it might rise in the future, and also the zero-rated categories may taste an increase in the future. This creates an ambiguity for both the owners and the consumers, as they worry the burden will be passed on to them.

Accounting Entries for Booking the Tax in the system

  • For Purchase/ Expenses.

Purchase accountDr

Input Tax AccountDr

Supplier Account / Bank AccountCr

  • For Sales Accounts

Customer AccountDr

Sales AccountCr

Output Tax Cr 

  • Output Tax - Input Tax = Net Vat Payable Account

Net vat Payable AccountDr

Federal Tax Authority Cr

Benefits of Proper Accounting 

Proper Accounting and allocation of costs will benefit the business in the following ways: -

  • It increases the cash flow
  • Avoid booking tax in the cost
  • All claimable tax will be treated as a balance sheet item
  • Always depends on Accounting Software to track tax effect

What Choose CDA?

  • We help the businesses know how VAT is levied on their commercial activity in the UAE
  • We help the business familiar with the new tax system or renovate the financial structure
  • We help the business reassess the suppliers to analyse the impact of VAT on their goods or services which the company deals in.
  • We help the business to determine whether it is essential to invest in additional manpower to ease the tax collection 
  • We help the business to apply vat correctly to avoid any supplementary cost to the business
  • We help the business assess their current contracts to see if vat has been suitably addressed
  • We help the business maintain the VAT account, submit the reports regularly and file the tax to the government
  • We provide VAT training to the management/employee
  • We do the overall analysis of the company’s each area of cost centre to reduce the tax effect
  • We re-module the company policies which are helpful to the tax system
  • We advise owners about their expenses and input tax effect on their company-related expenses

CDA also provides numerous business services that comprise CFO Services, Auditing Services, Accounting & Bookkeeping Services, Accounting Software services and Due Diligence Services.

If you have any queries regarding the impact of VAT on your businesses or about your current business, feel good to discuss with us. CDA is there for your support! 

Our expert will give you one-hour Free Consultation to keep your uncertainties away!


Frequently Asked Questions on Vat Impact On Company Profit

No, input VAT cannot be considered a cost. This is because, in order to arrive at the returns for the particular tax period, the input VAT is netted off against the output VAT. The net figure is payable to the authority. While, if it is refundable for the tax period, the input VAT can be claimed back from the authority.

If discounts are given before or after the date of supply or if subsidies are provided by the State to the supplier, the value of the supply reduces in line with the discounts or subsidies. Tax will be calculated on the discounted price if the discount fulfils two conditions (1) customer must benefit from the discount, (2) supplier funds the discount.

The value of a gift voucher would be the difference between the consideration received by the supplier of the gift voucher and the Advertised value of the gift voucher. This will not be considered a supply (not taxable) if the consideration does not exceed the advertised value.

Yes, you can recover the tax paid. This will not be considered an entertainment expense as this expense is necessary for the employee to perform his/her role, provided, this accommodation is for a limited period as initial support to the employee.

The expenses eligible for input tax recovery are (1) tea, coffee, dates, chocolates and other similar snacks for office use or during meetings provided to employees and visitors for no charge, (2) flowers purchased for display in receptions or offices or special occasions.

Yes, you can recover the input VAT in the subsequent tax period. Also, if input VAT has not been claimed in the first two consecutive tax periods, voluntary disclosure would need to be submitted by amending the input tax in either of the tax periods.

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