Increase prices or absorb VAT? Dubai firms dilemma

UAE firms face dilemma: increase prices or absorb VAT. Firms selling small value items face major issues, says tax expert. Some companies in the UAE are likely to absorb value added tax (VAT) and hold prices at the pre-tax level, according to a tax consultant. The UAE will implement 5 percent VAT from January 1, 2018 and companies may keep prices the same in order to maintain or gain market share.

“The introduction of VAT does not simply mean you add 5 percent to the current selling price, collect it from the customer and pay it to the government,” said Brian Conn, partner, tax advisory services, BDO.

Some companies in the UAE are likely to absorb value added tax (VAT) and hold prices at the pre-tax level, according to a tax consultant
Some companies in the UAE are likely to absorb value added tax (VAT) and hold prices at the pre-tax level, according to a tax consultant

“But before getting to that point, a company has to take a strategic decision on whether to raise prices or hold prices for a while and absorb some or all of the VAT in order to gain market share.”Conn said companies in countries with established VAT systems do tend to absorb VAT and expects some UAE companies will follow suit.  Even if companies in the UAE decide to hike prices, the tax consultant said there are many consequences to that decision.

“Firstly, it is essential that contracts allow for the price to be increased by addition of VAT. If this is not addressed, businesses runs the risk of having to pay VAT themselves than being able to collect it from customers, which will inevitably hit profits.

“So businesses will have to look at all of their contractual terms, including current contracts that run on until after January 1 and contracts signed now with delivery dates after January 1,” Conn added.However, the issue of increasing price or absorbing VAT will be a major concern for companies selling small value items.

“Consider a product is sold for AED1 now but the company can’t simple increase it by 5 percent to AED1.05. Hence, it has to either absorb the cost and maintain the same price, or round it up on the higher side that will lead to a substantial price increase” he said.

Conn said companies are likely to face cash flow issues post VAT is implemented since the government is yet to clarify on duration of the tax refund process.