Will VAT increase cost of doing business ?

Any tax has the effect of increasing the overall price that the end consumer pays, hence, it is expected that even with all things remaining same, the prices would increase to the extent of VAT applied.

Coming to the GCC region the impending introduction of VAT will have the same impact of increase in prices for non-exempt and non-zero rated products and services.  Clarity on what these would be will only emerge once the laws are published.  However, the way to look at the price increase is very different.  In any market and an import heavy market (for non-oil) like GCC, the market has its own competitiveness wherein all goods and services are available at a range of prices, obviously there is a minor difference in the product or source of product based on which the price differential exits.  To take a simple example, the range of pricing for a pizza or a cup of tea is significant in the market.  It is a choice that the consumer exercises based on their own preferences and capacity as to which part of the range they would be comfortable with.  Hence, the small VAT percentage proposed should not have a major impact on pricing and consumption pattern in the region.

Having considered the consumer side aspect of cost, we can now consider the core subject of the post – Cost of doing business.  Inherently, VAT does not increase the cost of doing business on its own.  However, in regions which have been tax free there is a tendency to not maintain books of accounts as the same is not mandatory but only a best practice, hence, the big organisations would maintain the accounts while the smaller firms unless required by their parent companies tend to avoid the activity as a cost.  This cost is considered as the only increase in the cost of doing business, however, it is considered positive as maintaining books of accounts are best practices like maintaining fire-safety standards, house-keeping standards, etc.

All costing and pricing models currently in place can comfortably continue with the introduction of VAT by adding a layer to account for the VAT input and VAT charged.  For businesses wherein the turnover from procurement to sales and settlement of the same is within a month, there is absolutely nil impact expected.  However, scope for increase in working capital requirement is anticipated for businesses where the turnover cycle is longer, this is considering the fact that credit terms which overlap the VAT reporting cycle date would result in having to settle the VAT charged prior to receipt of funds from the buyers.   The longer the credit terms the bigger the impact.

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