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Abu Dhabi, UAEFriday 21 September 2018

VAT is a worry for some and not so much for others

SMEs have the option of getting help with VAT registration and returns from qualified accounting firms

Ibrahim Colak, chief executive of mrUsta, is confident that his venture linking customers with companies will flourish this year. Christopher Pike / The National
Ibrahim Colak, chief executive of mrUsta, is confident that his venture linking customers with companies will flourish this year. Christopher Pike / The National

Ibrahim Colak is confident, in more ways than one.

Take, for example, his decision in 2013 to bring a new concept to the market, when he co-founded a company which has subsequently brought thousands of businesses previously offline, online.

And he is certain that his business, mrUsta, an online marketplace which connects customers to companies, will keep on expanding in 2018.

But some of the service providers listed on his website are more cautious about their prospects this year, particularly when it comes to the introduction of value addex tax (VAT).

So he decided to team up with a service provider listed on the website, accountant AN Associates, to explain how they will be affected by the new levy, and what they need to do to get ready.

“We have 7,000 SME [small and medium-sized enterprises] service providers on our platform and they don’t have anyone to advise them,” says Mr Colak.

“So we contacted some of our service providers, because we do business set-up services and business services as well. We wanted to educate our service providers through this.”

The consultation event, which was held in November, explained more about the tax, and showed SMEs listed with mrUsta how to register with the government. It also offered its service providers a special discount on accountancy packages offered by AN Associates. Some 12 of the 80 entrepreneurs who took part have signed up for the packages offered so far.

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“Some of them were worried because they were not sure if they were going to pay taxes or not. It wasn’t very clear at first which sectors will pay taxes and which is exempt from paying tax. They were not sure which documents they needed to submit to get the VAT number. So we also made it very clear for them,” he says.

The rollout of VAT, a consumption tax on goods and services, is being introduced across the Arabian Gulf region, with the UAE and Saudi Arabia the first two GCC members to implement the new tax regime from January 1. It is designed to help countries across the region diversify their economies away from their reliance on oil. It is expected to generate Dh12 billion in its first year and Dh20bn in its second year in the UAE, according to government officials.

“VAT is being introduced at a time when the economy is in relatively good shape,” says Tim Fox, chief economist at Emirates NBD. “In that sense the economy should be in a strong position to absorb the impact of VAT. We should also bear in mind that the 5 per cent level of VAT being introduced in the UAE is modest compared to some other countries such as the UK, where VAT is currently at 20 per cent.”

Yet some experts warn that its introduction could represent a significant challenge to SMEs, particularly revenue generating start-ups and companies on the smaller side, which do not have an accountant on the payroll.

“I think the introduction of VAT on a small business will be very challenging,” says Naveen Sharma, chairman of the Dubai chapter of The Institute of Chartered Accountants of India.

The reason, he says is the limit of Dh375,000, which is almost Dh1,000 per day, which is particularly challenging for the smaller vendors.

"He is doing his business from the morning to evening. But now he has to file the returns. He has to keep the records. He has to keep the system. He has to upload it. So he will have a headache,” Mr Sharma notes.

Sylvia Youssef, the director and founder of how2uae, a firm which specialises in helping new entrepreneurs set up their businesses, agrees that going forward, SMEs may need help filing returns. The introduction of VAT, she says may put some entrepreneurs off from launching a new business.

“We are seeing a lot more people who are holding off from setting up businesses, just because they want to see how the economic climate will change next year,” she explains.

“Either way, there is some risk associated with it. But if you have the correct business model, if you know how to drive your business, then I don’t think it should affect you that much. It’s just about managing the situation.”

Ms Youssef says 2018 will be a challenging year for startups, as the uncertainty surrounding the introduction of VAT and the UAE being a more expensive place to do business as a consequence of new levy will compound problems for them.

But not everyone thinks VAT will have such a negative impact on the economy.

Bernard Lee, the co-founder of GlassQube, Abu Dhabi's first co-working space, for one, is not worried.

“I don’t think it’s a big deal. I come from a country with a similar tax. I think there is a lot of hype because people in this country are not accustomed to it,” says Mr Lee. “I am not too concerned about how it will affect business because everyone has to pay it. So it’s not like we are going to be uncompetitive. It effectively neutralises itself from a competitors’ standpoint."

Fellow entrepreneur Mustafa Koita, the chief executive of Koita Milk, a company selling organic milk produced in Italy, admits that he was worried about the introduction of the tax at first. However, since learning more about it, he has come to think that it is no big deal.

“My accountant went to a class and figured out everything. So in terms of preparing for it, you have to update all of your documents, your invoicing. You have to share your tax number with all your customers. And this includes our Saudi customers and [those in] Kuwait. Anyone in the GCC, basically. That was the second step,” says Mr Koita. “The third thing what we realised while we were doing this is that there is really no effect on us.”

He says companies are, in effect, just a pass through agent, as it is consumers, like himself, who are paying it.

The net effect of the tax will be more stability in the region in the medium to long term, says Mr Koita.

“That’s a great benefit. You have to look at the long [term] perspective but I think it’s going to be good,” he adds.

The biggest impact on Mr Koita’s business has been a few days away from the office for his accountant, who went away to get up to speed on the laws. He then sat down with the operations team to update them on the necessary paperwork.

But other SMEs, which do not have an accountant, have the option of getting help from companies such as Mr Colak’s mrUsta.

Or they may decide to do it alone, like Mr Lee, who does not have any plans to hire anyone to help file his returns as the registration process, according to him, is remarkably easy.

He contends that tax is the least of anyone’s concerns here.

“I think what people should be focused on as to what’s going to affect the market is oil. Where is oil [price] going to be? As long as oil [price] stays where it is now and continues to inch up, things will be fine. But if we see some cataclysmic event, geopolitically or otherwise, and we see it [oil prices] go back down to $40s [a barrel level], it is going to be a bit ugly for a while,” he says.

“I am cautiously optimistic that 2018 will see some positive growth. Modest, but positive.”

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