1.  How is VAT collected?

Answer : VAT is the tax which is charged on the gross margin at every stage in the sale of goods. Tax is assessed and collected at each point, starting from the manufacturer until the product reaches the retailer. It is a multistage tax system with provision for collection of tax paid on the purchases at every point of sale.

Value Added Tax (VAT) is a general consumption tax on the consumption of goods and services. VAT is an indirect tax which is to be paid by the end-consumers. Collected by businesses liable to tax, VAT is included in sales prices, and the VAT revenue is paid to the state.

2. On which businesses does VAT apply?

Answer : All business transactions involving the sales of goods/commodities carried on within a state by individuals, partnerships, or companies will be covered by VAT. VAT will not cover small businesses with sales below a certain limit. In Maharashtra, the limit is 10 lakhs or below.

VAT affects all non-U.S. sales, purchases and imports.

3.  Filing a tax return for VAT

Answer : All goods and services producers registered under the VAT Act 2003 are provided with a user Id and password by the Directorate of Commercial Taxes. Users need to use these credentials to log in to the VAT e-filing system. Alternatively, the Directorate help desk can help in retrieving the login details.

Prerequisites for e-Filing VAT Returns :

1. TIN Number: The tax identification number (TIN) is required before you start the VAT e-filing process. TIN is an 11-digit number furnished by the state tax department. This number helps to track any payments or e-payments made and previously filed returns.
2. Login Details: You should have the user ID and password received from the Tax Directorate office. In case this is your first VAT payment, you will have to change your password before you can proceed. Without these, no user can log in and pay his/her VAT return online.
3. e-Filing Software: All state tax departments have issued software for e-filing of VAT returns. A download option for this client software can be found once you have logged in the online portal. This software accepts the data for the e-filing of return and processes it into XML. This can be later uploaded to the online portal of the Directorate of Commercial Taxes of the state you’re in.
4. VAT Receipts: You will obviously need the details and challan numbers of the VAT receipts, against which you have made payment or e payments in the previous month.

Listed below are all the steps that you should follow for VAT return e-filing:

Step 1: Log in

Log in to the online portal of the Directorate of Commercial Taxes for your state. Since VAT comes under the purview of state governments, each state has different VAT e-filing portals. However, the procedure is the same for all of them.

Step 2: Password Change

If you are entering the website for the first time, you will be needed to change the password which you should certainly do.

Step 3: Form 14D

Next, you will have to download the PDF version of zipped Form 14D file; on unzipping it, you will find a PDF version of the form. This is the VAT return filing form which you need to fill completely, along with the annexures.

Step 4: Complete the Form

Once the download is complete, the form and all the downloaded annexures need to be filled duly with data contained in your VAT receipts and other relevant details. This can take you a couple of hours or a whole day depending on the number of transactions.

Step 5:Generating XML

Using the downloaded software from the Directorate of Commercial Taxes online portal, you can create XML files out of the filled forms within minutes. Only Form 14D should be uploaded to be in XML, not the annexures, as only it needs to be digitally processed

Step 6:Upload

Upload the generated XML file as well as the duly filled annexures.

Step 7:Correct Mistakes If Any

The filing system instantly spots mistakes you’ve made at this point, so make sure that all data uploaded is correct otherwise the server will prompt and ask you to rectify.

Step 8: Acknowledgement

Once all the forms have been submitted successfully, an acknowledgement receipt will be generated. This is proof of your VAT returns filing for the month. You can either download or print this receipt.

4. The expected consequences of VAT in UAE on Individuals and Businesses

Answer :The new VAT rules raise a number of new challenges and considerations for UAE companies.

1. Increased costs
With the new VAT laws, your business essentially has an extra function to perform, which comes with an unavoidable set of admin and implementation costs. In order to make sure you are collecting VAT correctly, complying with the new laws, and able to do your new quarterly VAT reporting, you’ll need to update IT and internal systems, train your employees in VAT processes, and potentially even employ an accounting specialist to help with the transition. It can be expensive, particularly at the beginning, and particularly for small labour-intensive businesses. But it can’t be avoided. The collection and remittance process is mostly self-assessed, and mistakes can result in hefty penalties, laborious exchanges with local tax authorities, and expensive disruptions to your business.

2. Changes to business structure
Aside from having a significant cashflow impact on some companies, VAT will be charged at each stage of production and distribution, which can be problematic if you have more than one business entity handling the same product or service. In order to avoid being taxed on transfers made between different stages, and therefore paying VAT twice, you’ll need to bring them together. If you’re a larger business with multiple entities, you may have to consider a more significant restructure to avoid VAT leakage.

3. Being accountable
Now that you’re VAT-registered, you’re legally required to prepare and keep a range of business records so the government can check that you’re getting things right. The authorities can ask for annual accounts, general ledgers, purchase day books, and invoices issued and received, as well as credit and debit notes. You’ll need to maintain these records for a minimum of five years, keeping them up to date, ensuring they’re valid, and having them ready to supply when your business undergoes an audit.

4. Uncertainty about the future
VAT rates aren’t set in stone, and a number of UAE companies are concerned that the rate might rise in the future. And it’s not just the 5% rate that might be affected. Whilst exempt categories are likely to remain exempt, zero-rated products may also see an increase. This prospect creates uncertainty for both businesses and consumers, who will naturally be worried about increased costs being passed on to them.

What are the upsides of VAT for the UAE?
Still, let’s not overlook the number of benefits to be gained from VAT, both for the UAE as a whole and for your business and future profitability levels.

1. Boost to government coffers
The new tax is expected to bring a significant new revenue stream to the UAE government. According to His Excellency Younis Al Khouri, Undersecretary at the Ministry of Finance, the measure is expected to raise around AED 10bn to AED 12bn in the first year of implementation alone. This revenue will go into creating a more stable economy, which can’t help but have a positive knock-on effect on local businesses.

2. Improved infrastructure
Not only will the revenue help to stabilize the economy, but it will improve the country’s infrastructure, making it easier and less expensive to do business in the UAE. Investment in infrastructure often has a significant effect on economic development because of multiplier effects, which means that for every AED 1 invested the impact on GDP is even higher. What’s more, value-creating tax strategies can give you a competitive advantage compared to other countries in the region, although in the UAE’s case this will be neutralized by the fact that all six GCC countries will eventually implement the same measure.

3. Non-financial benefits
As demonstrated by a number of successful global implementations, tax regulation can bring many non-financial benefits to an economy. The most important of these is improved liability management. The introduction of taxes, particularly VAT, can play an important role in enhancing government accountability and democracy. Official taxation records, properly managed, result in faster and more informed decision-making, and reduce the incidence of civil fraud, corruption and waste.

4. Increased business efficiency
Companies may see an initial rise in costs when administering and implementing the roll-out, but there are plenty of long-term benefits to be gained from replacing inefficient, out-of-date accounting systems. Once VAT-compliant systems are in place –for smaller companies these might even be low-cost software or apps– many businesses will run far more efficiently, and will gain a long-term benefit from this streamlining exercise.

5. Distributed costs
Although small businesses in particular have the upfront implementation costs to consider, it’s the consumer who is ultimately going be hit the hardest by the new VAT laws. Although the process of collecting and remitting VAT lies with you, the company, ultimately it will end up being charged to the customer via sales channels. So, even at the relatively low rate of 5% it shouldn’t affect your bottom-line too much.

6. Advisory opportunities
The implementation opens up a market opportunity for advisory firms who specialize in VAT terms. Many companies won’t have the time or resources to engage in the complexities of the new VAT systems, and will look to hire consultants to help them understand the new laws, adapt their business, and set up VAT-compliant systems. It therefore offers a potentially lucrative opportunity for entrepreneurs looking to tap into this sector.