VAT (value added tax) can be defined as tax on consumable goods and services. Its percentage varies from one state to the other but has a 5% rate on GCC countries with this being the lowest worldwide. VAT is necessary for the economy as it is a form of revenue in the country and is levied on small, medium and large businesses.
This tax is levied on different stages of the supply chain i.e. from the manufacturer, to the wholesaler, retailer and finally the consumer. It is charged on the products as it moves along the supply chain adding value, hence the name “value added tax”.
There are some products however that are exempted from VAT, this may include, health care, education, some form of real estate transactions, as well as local transport. The exemption of goods and services from VAT differs from one country to the other.
Advantages of VAT
VAT is a form of revenue for the government and also a way of tracking businesses on tax payment. The government uses these funds to build their public sector mandates and to stabilize the economy and ensure its growth.Impacts of VAT on businesses
It is important to note that VAT is considered as a cost and not an expense. The businesses only act as VAT collection agencies for the government as it is levied on the consumer when he/she purchases the end product. This however affects a few things in the business which are:-- Pricing – The end products price will have to include VAT before the consumer makes a purchase.
- Profit margin – The profit margin will also be greatly affected depending on the VAT rate of the country. This means the price of a product will not only have the VAT levied on it but will also have the business’s profit included thereby making it ridiculously expensive.
- Accounting – VAT will also affect the business accounting books where the business will be required to indicate the VAT levied on the product along with its total amount.
- Cash flow – The businesses cash flow will also be greatly affected by the VAT levied on it, where the business will be required to clearly indicate the VAT rate needed to be collected as well as indicate a clear profit margin of the business.
How to become VAT compliant
Any registered business that sells goods and services that are not VAT exempted should have an automated VAT system embedded in their financial and accounting systems. It is important to find out which products are exempted from VAT before levying the tax on it.Failure to compliancy may lead to penalties of up to five times the original VAT rate and it’s always safer to have an automated VAT calculator that deals with the deduction of this tax once every consumer makes a purchase. The VAT rates as well as penalties vary from one country to the other depending on the economy. VAT increases revenue for the government and aids in the enhancement of public sector services.