VAT The Retail Industry has emerged as one of the most dynamic and fast-paced industries in the Middle East due to the entry of several players. The retail sector of the Gulf Cooperation Council (GCC) member countries has always been appealing, owing to a growing population base, high-income levels, increasing tourist activities, progressing consumer preferences and the encouragement from the government towards economic diversification.
Given below is an overview to retailers in understanding matters pertaining to Value Added Tax (VAT) treatment in retailing and related industry.
What are the VAT registration requirements?
A recognized business that is conducting economic activities in the Gulf Cooperation Council (GCC) member countries must register for VAT if it produces Taxable supplies or imports that exceed the mandatory threshold of AED 375,000 (or the local equivalent) and may choose to register for VAT voluntarily if its supplies and imports are less than the mandatory registration threshold but exceed the voluntary registration threshold of AED 187,500 (or the local equivalent).
How will VAT impact the retail industry in the gulf region?
VAT is the most anticipated Indirect Tax in the Gulf region and is generally collected by an intermediary that is, the retailer from the end customer who will be bearing the ultimate economic burden of the Tax. The introduction of VAT will bring drastic changes in the GCC retail sector and in order to keep up with these changes the retailers will have to adjust their profit margins and re-evaluate their business models. The retailers will now have to keep a record of all the transactions conducted, maintenance of invoices i.e. sales and purchase invoices which will be required for filing returns.
What will the price of retail goods and services be?
The price of the goods and services sold to the final customer will be a VAT included price.
How will VAT affect the prices of retail goods and service?
The tax under the VAT law is usually payable on the final sale price which leads to the increase of the prices of the final Goods and Services that are sold. Considering that the Gulf region was a Tax Haven prior to the introduction of VAT; the implementation could lead to a negative impact in terms of the prices which could further cause an arise on inflation. To minimize such adversities the Gulf Cooperation Council (GCC) member countries have exempted the Goods and Services of basic necessities.
How will VAT affect the demand for retail goods and service?
Usually, an increase in the price would lead to a fall in the demand for the product or service. When the price elasticity of the goods and services the retailers may actually need to pass a small proportion of the increased cost onto their customers and suffer 50 percent of the increase themselves in an effort to retain market share. In case the demand for the product is perfectly inelastic then the retailers should be able to pass on the full burden of the VAT to the customers. In such a situation retailers should consider undertaking a detailed price modeling analysis to understand what effect the introduction of VAT could have on demand for their product. This analysis would also provide the retailers the tools to be able to establish how much it could limit any price increases.
What are the issues that retailer need to consider?
Under the new VAT laws, the retailers have certain rules to abide by to the way in which they may carry out transactions, and these might be different to those pertaining to other businesses, these rules could possibly include:
- Different accounting techniques for VAT;
- Different invoicing requirements for goods under a certain value;
- Possibly complex rules for discounts, promotion schemes, loyalty programs and vouchers;
- Special rules for paying a ‘security deposit’ for purposes of ensuring that a transaction will be completed;
- Tourist refund scheme criteria and indeed whether such a scheme will apply;
- Treatment of linked products, for example where one product is zero-rated, and the other is standard-rated; and
- Additional VAT recovery considerations for goods sold on finance.