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After introducing Value Added Tax (VAT) in UAE on January 1, 2018, the business which has an annual turnover over AED 375000, and AED 187500, to those who voluntarily register with VAT, has to pay tax to the authority at a standard rate of 5%. VAT services are important for every business entity in the UAE. All the companies in UAE must register for VAT which comes in the above-mentioned criteria so that it is recognized by the government and get the authority to collect VAT on goods and services from customers on behalf of the government.
Importance of registering with VAT
If a business is registered with VAT, it would help the business in many ways. A business registered with VAT is legally acknowledged and the goodwill of the business increases. When an accounting firm in Dubai is registered with VAT, it is liable to file the VAT returns periodically on time. The business can reduce the cost, reclaiming the input VAT which is helpful to the accounting firm to maintain a better cash flow, whereas if the business is not registered with VAT then they may have to incur huge costs and maybe not be able to reclaim the input VAT. The registered entity can also reclaim the VAT for the past transaction but to claim that, it must maintain all the records and invoices related to that transaction. In some scenarios, the business can recover more input tax than the output tax by reclaiming it from past transactions.
When a firm is registered with the VAT, it is given a specific registration number which can be used to carry out the transactions. And the number will reflect the firm's position in the market to others, it will show that your firm is capable of performing the business and earns an adequate annual turnover. It helps to increase the confidence among the customers regarding the firm hence the credibility will be improved due to registration. It shows that the firm is having a good position in the market and hence it is financially sound. The firm gets a specific identity in the market which will improve its working. If they are registered with VAT then they have to maintain a systematic and accurate record of all supplies and purchases made on taxable goods and services, as it helps the firm to reclaim the excess of input tax from the FTA. The firm registered with VAT can expand its business by collaborating with other firms because if you are registered with VAT the other companies won't hesitate to perform business with your firm.
What if you are not registered with VAT?
Let us consider a firm "ABC Enterprises" in UAE which deals with textiles industries and was not registered with VAT. So it wasn't liable to collect VAT from the customers and pay it to the FTA.
Later the industry decided to import some raw materials from abroad. According to the VAT laws, any goods imported from outside the country must be charged with VAT on a reverse charge mechanism i.e. the buyer itself has to bear and pay the tax. When the firm received the goods it was bound to pay a good amount as tax to the authority since they ignored to register with VAT, they couldn't reclaim the tax from the FTA which resulted in an increase in cost. Similarly, they were exporting children's clothing which was included in the zero-rated supplies to abroad and it was charged VAT @0% (no output tax charged) hence the input tax (tax paid) gradually increased than the output tax (tax charged on supplies) because it purchased some raw materials within the country from a supplier, but still, the firm wasn't able to reclaim for input tax from the authority, which turned out to have cost in the accounts of the firm.
From the above situation, we come to know about the consequences we may face if we are not registered with VAT. It may also result in penalties and fines which may be charged on to the firm by the authority and again the cost will increase, which may have a drastic effect on the bottom line of the firm and its goodwill.
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