The introduction of VAT is on the anvil. The registration has also commenced in both KSA and UAE. What will the impact of VAT in this erstwhile tax-free region be?
By sheer numbers, the small and medium enterprises in the region form a big chunk of the overall businesses, these are businesses with a turnover of less that 10 Million. Given the ease of doing business and ample free-zones, which actively market for business, the number is only expected to increase.
These businesses have traditionally relied on "trust" as the primary basis of business, this reliance has been the key factor for the evolution of the business culture in the region. Consequently, a promise made is sufficient to trade. If the promise is not kept, alternate assets can be used to settle the dues. This is the reason for not only majority of small businesses but also big businesses including banks, placing a significant value on Cheque (promissory note) as a major control to ensure repayment or settlement.
The businesses here, have never been subjected to taxation requirements, hence, best practices like accounting and record keeping was only adopted by the big businesses, for whom, their scale of operation and reliance on hired help, made it a basic requirement to manage their business. But these businesses as a percentage account only for a small percentage of businesses in the region.
The majority, still are dependent on trusted suppliers and customers, (as against formal process of evaluation and quality checks) hence, generation of records in the first place is very limited. Further, maintaining proper books of account is not even in their lowest priority item list. The focus is on cash flow from day to day, month to month. In some cases, when accounting is implemented is when, the business realizes that there is a problem in their business, as cash and bank balances do not match up and they do not have any records available to reconcile the same. It also makes the business owner realize, that they have invested more than they thought in the business, as these investments happen in a piecemeal manner over a long period of time.
VAT has made maintaining proper books of accounts and records mandatory for a minimum period of 5 years at any point in time. This is expected to have a significant impact on the business culture in the region. As apart from trust, the business will have to ensure that TAX Invoices are collected, if any adjustments are to be made (which is very common in the region) then DEBIT / CREDIT Notes compliant to TAX requirements are issued. This shifts the habit of relying on persons to a habit of relying on documents. This in the long run directly impacts the business culture in the region, where in accounting and record keeping becomes basic and primary for any business and not a nice to have activity as it currently is.
Current business relations are primarily based on trust, i,e people you know or people who have built their credibility with their dealings over a period of time. While this is expected to continue, the relationships are expected to be tempered with parties who meet up with certain requirements. While exempt businesses are out of the purview of VAT, dealing with exempt businesses, specially, those who do not have a TRN number, because of the option they have exercised, increases the compliance efforts of the registered tax payer. This in the long run will become a pre-requisite for evaluating business relations similar to size of business, place of business, etc.
In any case, VAT will only improve the quality of business, as transparency will not only help the tax authorities to evaluate businesses, but also the business owners themselves to see where their business stands in an -objective manner