Value Added Tax – popularly known as VAT – is all set to be part of the daily parlance in the UAE. Scheduled to be implemented from January 1, 2018, this new system will further strengthen the nation’s revenue from non-oil sources.

VAT is a broad-based consumption tax that is based on expenditure and not income. It is imposed on goods and services at every step of the value chain based on the incremental value each stage commands till it reaches the end consumer – the final taxation point.

While the word tax does bring out some negative connotations, it is important to understand how this will impact your household financially. Firstly, it is important to note that it is a consumption-based tax and hence varies based on your consumption habits and patterns. Secondly, not all items will have a VAT attached to it, especially in the case of essential goods, meaning your monthly shopping bill might increase but surely less than five per cent. However, if you are the takeout/eat out household, then expect your monthly food bill to jump by five percent. The VAT impact will be felt the most when you go retail shopping.

And, retailers have to be prepared for the VAT effect which goes beyond just implementing the five percent.

Increased workforce

The first impact of VAT is the requirement of taxation professionals with VAT experience. As this is a pan-GCC introduction, the demand for these professionals is quite high, resulting in increased sourcing and relocating costs.

IT system enhancements

System upgrades and maybe even overhauls are required to ensure the smooth functioning and accounting of VAT. This is a major task and along with bringing in the taxation professionals, it must be done at the earliest (if not done already).

Assessing VAT impact

Each segment of the retail industry will need to analyse how VAT will impact their business in the short and long run. This is very important and will be the bedrock for the organisation’s strategy for the next few years. A general perception is that high-margin retail segments like luxury goods and apparel might absorb the VAT in the short run while low-margin retail segments like electronics will pass it on to the consumer immediately. However, there is no hard and fast rule and each organisation will have to see its own strength and stability before making the call.

Discounts and VAT

One of the major challenges retailers will have to address is how to plan their discounting strategies. Do we include the VAT component in the discount or should it be separate? Given the ‘sale’ culture in the UAE, especially in the retail capital of Dubai, this aspect of the trade is set to have the greatest impact on a retailer’s bottom line.

Understanding the consumer

This is the most important aspect of the VAT effect. The most important question a retailer needs to answer is: Will my customer be ready to pay an additional five per cent to buy my product? The tourist is also a major factor here as there is still no clarity on VAT refund for tourists who are a vital part of the retail shopping industry.