Real estate companies in the United Arab Emirates should consider lowering costs and business expectations to minimise the impact of the new 5 percent value-added tax (VAT), a top official at Dubai-based retail group Landmark, has said.

Under a recently-released UAE VAT law, only newly-built residential properties will benefit from a zero rate for VAT for the first three years after they have been completed. This will allow developers to claim back VAT paid on construction costs.Residential real estate, on the other hand, will be exempt from VAT, which, unlike the zero rating, does not allow owners to reclaim VAT paid on business costs.

“For the real-estate sector because we are customers of the real estate sector, I hope that they (real estate companies) realise that in the UAE, especially, real estate has become very expensive and that is impacting the long term prospects,” Rajesh Garg, Landmark’s CEO and chief financial officer told Zawya last Monday on the sidelines of a GCC VAT forum in Dubai.

“I think they need to rein in some of their own costs and expectations, and probably they should definitely try and minimise the impact,” he added.

All of the countries in the GCC last year agreed to introduce VAT on a number of goods and services as a means to diversify their sources of revenues. The UAE said it will introduce VAT starting next January and the country’s president¸ Sheikh Khalifa bin Zayed Al Nahyan, last month ratified a law approving the introduction of the new tax.

However, the new VAT law’s regulatory framework, which is expected to include more details about the goods and services subject to VAT, has yet to be released. According to the director-general of the UAE’s Federal Tax Authority, Khalid Al Bustani, the framework is expected to be unveiled in the fourth quarter of this year.

In general, Garg does not expect VAT to have a significant impact on sales.

“I think it is going to be minimal because, you know it is a very small tax and it is everywhere in the world. Overall, I think the whole industry will adjust,” he said.

When asked about how Landmark, which is one of the Middle East’s biggest retail groups, plans to cope with the new tax, Garg said: “We are retailers, we have to become more efficient because the last thing we want to do is to impact the customers… we need to find more efficiencies, so that the impact on customers is minimal.”

He said retailers will have to assess the position of their competitors and value of their products before deciding on whether to pass on the full cost of VAT to consumers, or bear some of these costs themselves and reduce their profit margins.

“I think the retail will have a small blip from the implementation versus any real change in demand,” Garg said.

He added that he expects retailers to benefit from a burst of expensive-items buying in the fourth quarter, ahead of the introduction of VAT. “There will be more sales in November, December,” he said.

A small problem
Garg said his company had to work hard to make sure that all of its suppliers, which are mostly SMEs, are VAT-compliant.

“We are working very closely with all our suppliers… We have sent out communications, offered them help through information packages and how they can become VAT compliant,” Garg said

“We cannot do business without them being VAT compliant. So it is a huge area and one of the parts of the implementation is to make them come up to speed,” he added.

Small-to-medium enterprises account for 60 percent of the UAE’s gross domestic product and several of these had complained about the government’s delay in releasing details about VAT and the list of the goods and products that will be subject to the new tax.

Garg said the government’s delay in releasing VAT details had also made it harder for many big companies to prepare for the new tax. He said his company had to rely on models of VAT applied in other countries.

“The clarity on some issues was a bit challenging, and of course the sooner they come out, the best,” Garg said.

“But I commend the government for being in line as I had not heard anything that is so different from our assumptions,” he added

© Zawya 2017