Value added Tax (VAT) is expected to be implemented in UAE come next year. Significant work is being done by the relevant Government ministries to make the implementation smooth and user friendly.
One of the key impact of VAT will be on the small and medium businesses which are currently focused on their business and have a view of their business based on traditional cash-flow calculations. How much paid and how much received in a gross manner. The major impact is expected on this segment across all types of businesses as they need to put in the extra efforts to get ready for VAT.
These businesses will have to set up their books of accounts as per internationally accepted accounting standards, automate where necessary and capture the back-log of entries to bring their books of accounts up-to-date by 31st December, 2017. Accounting will also have to include detailed inventory accounting.
The reason for the above is the way VAT usually gets applied. A seller has to charge VAT and collect it from the customer and pay it to the Government treasuries. The seller is also the customer of downstream suppliers and they also do the same thing, so in short the seller has also paid VAT on his purchases. Globally, the concept of VAT credit exists, which means the seller can make a claim with the Government treasuring to have a refund of the VAT paid by him to his suppliers on the Goods sold (not on the goods still in stock or unsold). This should make it clear as to why getting into and maintaining a proper books of accounts will become most critical for the SME.
As VAT is expected to be applicable by 1st January, the stocks already purchased as at 31st December, will not have VAT levied on them by the supplier, but when sold from 1st January onwards will have to be sold with VAT.
The above is just to highlight the urgency to maintain proper books of accounts given the implementation of VAT.