03 August 2017
With the impending launch of VAT across the GCC, are SMEs in the region prepared enough for the changes ahead? The answer is 'no', according to UAE-based trainer and VAT consultant Aly Rehan Khan.
While large companies in the GCC have started their due diligence exercise to evaluate post-VAT scenarios, SMEs in the region are currently in a state of denial, Khan warned.
"Due to the delay in the announcement of the GCC VAT framework and the absence of desired expertise, SMEs are finding it extremely difficult to evaluate the probable impact of VAT implementation on their business," he said.
Yet advance measures to counter business challenges are direly required, he said, adding that the challenges SMEs face are two-fold: internal and external.
External challenges
Internal challenges
The VAT expert concluded it is "erroneous" to believe that VAT will not have a direct cost impact on SMEs.
He recommends five practical steps on how regional SMEs should prepared for VAT:
With the impending launch of VAT across the GCC, are SMEs in the region prepared enough for the changes ahead? The answer is 'no', according to UAE-based trainer and VAT consultant Aly Rehan Khan.
While large companies in the GCC have started their due diligence exercise to evaluate post-VAT scenarios, SMEs in the region are currently in a state of denial, Khan warned.
"Due to the delay in the announcement of the GCC VAT framework and the absence of desired expertise, SMEs are finding it extremely difficult to evaluate the probable impact of VAT implementation on their business," he said.
Yet advance measures to counter business challenges are direly required, he said, adding that the challenges SMEs face are two-fold: internal and external.
External challenges
- Nature of supplies - "The companies operating in sectors where their products could be declared as an exempt supply are in the danger zone," explained Khan. "Similarly, standard-rated supplies will also result in an increase in price and a resultant fall in demand. Zero-rated supplies are expected to stay free from any serious impact as the entire input VAT can be claimed as a refund against those supplies."
- Industry situation - Khan said a temporary slump in the market is expected in the first quarter of 2018 due to the introduction of VAT. "This may last a little longer if businesses do not come up with a clear business strategy to counter this situation. Consumers will naturally be more conscious about their spending due to the expected increase in prices." But the VAT consultant believes SMEs will be the sector most affected by this as they are already not growing at a satisfactory rate. He fears the situation may worsen after the VAT's implementation.
- Tax reporting and compliance to local legislation - According to Khan, this will be a big challenge because compliance implies conformance costs, which include both capital and revenue expenditures. "Big companies are hiring consultants, but SMEs lack financial capacity for this. SMEs are looking towards the government to provide concrete guidelines for understanding and complying with VAT requirements, including some capacity-building support."
Internal challenges
- Financial capacity - This is the main internal challenge facing SMEs since VAT initially constitutes greater financial shock to businesses than consumers. Other substantial challenges include increased cost of production and prices; the cost of VAT implementation; and the cash flow investment in terms of VAT in products, sales shocks, market share retention activities, structural changes, and non-claimable VAT in company expenses.
- Human resources - The inherent capability and capacity limitations of SMEs will also pose a challenge, said Khan. "SMEs' business managers are finding it hard to understand, analyze and evaluate the real impact on their business in a post-VAT-implementation scenario. As SMEs are usually part of the supply chain of big companies, their fate rests with the business decisions of large companies in terms of managing business shocks, and aligning their supply chain in terms of value addition etc."
- Cost management issues - Small businesses will have to decide whether they will transfer the VAT costs to their customers, or differentiate themselves from competitors by creating a cost capacity within the business to absorb some of the VAT impact.
- Developing the right accounting and reporting system - For SMEs that lack internal capacity, this is an accounting challenge that they must address, according to Khan. "Similarly, a substantial cash-flow impact will be felt in terms of input VAT. Businesses will need to make provisions for post-VAT scenarios, [wherein] some quick marketing efforts will be required to manage gloomy demand. Apart from this, structural redesign may be required to boost business models' efficiency and align them with market and supply chain partners' needs."
The VAT expert concluded it is "erroneous" to believe that VAT will not have a direct cost impact on SMEs.
He recommends five practical steps on how regional SMEs should prepared for VAT:
- Come out of the denial phase.
- Form a VAT steering committee and give VAT ownership to somebody in the organization.
- Bring the entire team on board for a due diligence exercise on post-VAT impact.
- Trigger a project for VAT implementation based on impact analysis outcome.
- Embrace failures and keep moving up the learning curve.
