Merits andDemerits of VAT Advantagesand Disadvantage of VATA. Advantages of VAT1. VATpopularity is due to administrative advantage. Through credit method, it is very easy to get access the firmtax liability. Firm return can easily cross-checkunder this method. Generally, VAT is to be natural for allocation of business productionforms resources but sales tax encourages production integration vertically thus to evadethe intermediary taxes and sales to get a competitiveadvantage. As for a bicycle factory who is manufacturing own rimsand steel pipes etc, paid less turnover as comparedto others which go to purchase this material externally.
But in theVAT system, make them neutral theintegration of the process and make them able toadopt that production form which is more suitable for the economy. 2. It is also neutral for factors costs due to all value addedtaxes. On the opposite side, current taxation systems of a corporation do notencourage the capital equity use and disciplines in profits, VAT does not delaythe technology adoption which is capital intensive. 3.
It also evades the cost cascading effect but sales tax canlead to tax liability compounding but VAT not.4. IndirectVAT advantage is its impartiality with respect to the allocation of the resource.5. VATis lesser evasion is one of biggest advantage. Firstly, sales tax effect iscascading so, which is imposed on gross value and not allowed any input taxespaid or set off credit.
Results areconsumer’s prices can raise the higher amount ofaccumulates to the exchequers in a way to get revenue. Secondly, production canreduce due to VAT for industries and give space to refund system and not putthe burden on exports. Thirdly, VAToffers total transparency and it is a multistagetax imposed as a percentage of the valueadded.
In all, one of important thing isneed of VAT is a less avoidable tax.6. VATsystem in a country encourage the exports and give them a competitive advantage over others.
For exportable goods,a country refund the paid tax and under VAT system it is quite easy to separatethe tax from production cost but not forother taxes which gives the mix results for production cost. Trade tariffs alsoconsider the VAT refund because of thispractice can encourage exports.7. VATis more efficient because is a firm is in the lossthey cannot exempt it from its taxliability. They are not paid tax on profit but on the produced value. So this can improveperformance and cost production can reduce.
8. By VAT a uniform tax system cannot apply, some goods can enjoy zero-rate and some tax exemption and it is practically applicable too in VAT system. Multiple rates are not applied to VAT system. For credit system,it is easy to accommodate the multiple tax rate. All the advantages give a greateffect on VAT administrative flexibilityand easy to modify according to differentpolicies and authorities. B.
Disadvantage of VAT1. The first disadvantage of the VAT is not suitable for developed countries asit becomes so much popular (Hlbhiatia, 1996).2. It is a complicatedsystem and suitable for those government who are honest for cross-checking andcheck and balance on production activities and every firm tax liability.
So itis very important for economic and financial structureand habit for to keep proper accounts for every firm.3. Forproper VAT system, there is a need for cooperative taxpayers. Every firm hasto calculate its own liability for tax, paid and unpaid tax. Once, if the seller feelsadministrative authority is not properly awareof the tax system and not doing cross-checking,they can go for false purchase invoice and this can give space to as commonpractice for others too.4.
VAT rate is too much high, at the end therewill be less tax revenue over the sales tax collection.5. Ifthe taxpayer is fully honest but thissystem can force them to maintain the costly account and elaborate. Itcan be not economical for smaller firms.6. Account maintaining can be difficult,cross-checking and evasion tax can stopif there is some exception to this system and different tax rates. It is not acceptable to assume such government oradministrative authorities who have such tax system which is neutral claimed system for own distributive and allocatedeffects. VAT system cannot ignore the wealth and income inequalities, the non-competitivemarket, and capital formation needthrough different or selective tax rate system.
and once administrative adopt such system, there can be pressure for tax exemptions and zero-rates. This can leadstowards the failure of actual decisionsand not get the objectives.7.
VATincludes the efficiency, in shortage economy like price rise and speculative hoarding can raise such practices. According to the seller market, both seller and producerhave the intention to not increase efficiency and cost reduction since theselling of goods irrespective of high price and quality. All in all, VAT systemneeded very high efficient administrative authorities in the competitivemarket. In 1977 DTIC (direct taxation inquiry committee) check the VAT system feasibility and come up with theconclusion there is a caution to adopt such form of tax.
They concluded suchadoption has to be done on an experimental basis in a manner for limitedmanufacturing industries (Ibid).IntroductionSpecifically, the impact ofVAT on an economy check through the country GDP and VAT series tax. But in thecontext of Saudi Arabia VAT tax will be implemented from the first the quarterof 2018. So this is not possible now to study this relationship due to thelimited time frame. In this study, the main focus will be to check before andafter VAT implementation in the services sector((education and healthcare) on Saudi economy.
For this study, data will beobtained from different recent published articles, journals and compare it withthe other countries economy. VAT impact on Saudi service (healthcare) sector. To solve any issue, the methodology is one of an important step. It is well considered as a methodologyas research a method in a way to find the perfectsolution. Furthermore, it can be defined as principles, rules, and method which is applied to a particularresearch.
In this chapter will introduce the methods which are going to use for this project for datacollection as per VAT impact on Saudi service (healthcare) sector. 3.2 Research Question· Whatis the impact of VAT implementation in the servicessector (healthcare) on Saudi economy?3.3 Research MethodologyFor this study, data will beobtained from different recent published articles, journals and compare it withthe other countries economy.
VAT impact on Saudi service (healthcare) sector. Furthermore, this study is going to collectdata from the qualitative method, as VATis totally new concept for Saudi Arabia, so better way to apply qualitativeapproach. This method more helpful to getmore in-depth idea and better results.
Qualitative methods to collect data give dig deeper results and provide an opportunity to focus on to fine main challengesand opportunities for better understanding of the topic. Moreover, use of different articles, publishjournal and interview with different individuals to reflect the qualitativemethods. As interviews give real feelingregarding the topic for better results.3.4 Population and SampleThe main method isused as recent publish articles, journals, andinterviews. All interviews are done at KingAbdulaziz University, Faculty of Law. Different lectures from law faculty andstudents of law final year are taken as asample for this project.3.
5Data collection instrumentsAs per thetopic VAT impact on service sector in Saudi Arabia use interview and publisharticles approach. For this, data was collected after doing a personal interview with very participants. Interview time duration was 30 minutes.3.
6 Data AnalysisThe project uses the qualitative method fordata collection, comparative results analysis between data collection from publishing articles and interviews. 3.6 Reliabilityand Validity To collect dataform qualitative method is more difficult when tryingto set reliability and validity of data.As researcher mostly depends onobservation and data interview to data collection. Moreover, a researcher shows opinions from interviewees andtransfer the data for facts and analyzethe data for better results.
For this project,the true picture is taken as to use data collection in the more efficient way.3.7 MethodologysummaryThis project focus on VAT impact onservice sector in Saudi Arabia through recent publish articles given onlinedata and qualitative method.
Results andDiscussion4.1 IntroductionData was collected from availablepublish articles, online data, andinterviews for results. This section will discuss the results and provideinformation regarding the topic.
4.2 Data analysisVAT in Saudi ArabiaGulf corporation councilmember states representatives signed on the VAT treaty, and confirm tointroduce the VAT system formal way insix states. This treaty is considered asa basis for domestic VAT implementation for every member by specifyingcertain values through permitting theSaudi government to select different treatment of VAT as per supplies. VAT willimpact mostly industries sector, but particularly impact the following areastoo: Ø Financialservices sector.Ø Industrialand consumer productsØ Telecommunication,media, and technology.Why need of VATDue to weak sales tax system, there is a need for VAT originates with the intention to replace it (Purhoit,2000). 1st reason, sales tax effect is cascading so, which isimposed on gross value and not allowed any input taxes paid or set off credit.Results are consumer’s prices can raise the higheramount of accumulatesto the exchequers in a way to getrevenue.
2nd reason, production can reduce due to VAT for industriesand give space to refund system and not put the burdenon exports. 3rd reason, VAT offers total transparency and it is a multistage tax imposed as a percentage of the value added. In all, one of important thing is need of VATis a less avoidabletax.
This is all because oftax is divided into different parts and for any firm tax, avoid can be reduced. Ifany business minimizes its output, it canbe easily caught from the business buying output disclosures. Generally, VATcan take away all the above mention reason for the need of VAT and help tocontrol the economic stability and avoiddistorting. Implementation time of VATALL GCC members will goto implement VAT locally in the early month that 1st January 2018 or30 days next to the publication date. It consists12 chapter with 83 articles on the base VAT draft.
Tax ApplicationThe standard rate for VAT is 5% until unless any goods or servicescharged as exempt or zero-rated. As per the rules,Saudi Arabia has the flexibility to select the specific provision of goods orservices to consider as zero-rated or exempt, although required as exempt orzer0-rated to some supplies. Mandatory,zero-rated examples are medicines, goods exports, transportation overcross-border. Saudi Arabia has flexibility regarding towards the suppliestreatment of some food items, oil sector, commercial transportation on the baseof either take it as standard-rate of zero-rate, the standard rate is 5%. Othersectors like real estate, education, healthcare and local transport they haveflexibility and can opt between zero-rated and exempt treatments. Moreover,financial services providers have to be exempt and can take the flexibility ofthese services.
From all most important point is to make a proper distinction betweenexemption and zero-rate; for both cases, VAT has not be accounted on thesupply, an exempt supply is not normally allowed to recover input VAT overthese supplies. Zero-rated supplies normally allowed to recover input VAT. Must Zero-rated Maybe Zero-rated Ø Medical and Medicine equipment Ø Transportation over the border services and goods Ø Outside GCC territory goods exports. Ø Supplies of services over some cross-border Ø Some foods items Ø Commercial transportation supply use Ø Oil and gas sector Exempt or can Zero-rated Must exempt Ø Healthcare Ø Education Ø Real estate Ø Local transport Ø Financial services Ø All those goods importation which is exempt from the VAT.
VAT RateThrough signing the VATtreaty every GCC member is committed to implementing5% VAT, but allow to do some exemptions and zero-rates. As per the rules, SaudiArabia has the flexibility to select thespecific provision of goods or services to consider as zero-rated or exempt,although required as exempt or zer0-rated to some supplies. From all most important point is to make a properdistinction between exemption and zero-rate; for both cases, VAT has not beaccounted on the supply, an exempt supply is not normally allowed to recoverinput VAT over these supplies. Zero-rated supplies normally allowed to recoverinput VAT. VAT is significantly less the average OECD VAT rate which is about19%. As per IMF estimation, although this modest rate has more expectation tocollect revenue in the GCC and Saudi Arabia for VAT between 0.
8% to 1.6% ofGDP. As per the members of GCC following are the VAT percentage of GDP: Countries (GCC Members) VAT (5%) percentage of GDP Bahrain 1.6% Oman 1.4% Kuwait 1,4% Saudi Arabia 1.6% Qatar 0.8% UAE 1.5% Saudi Arabia VAT rate According to Sector Food items 5% LocalTransportationLocal 5% Real Estate · Commercial sales rent · Resdential sale · Hotel busiens · Resdential rent 5% 5% exempt Education · Private · public 5% Exempt Healthcare · Private · public 5% Exempt Pre-implementation action of VATThere is a numberof actions which Saudi government has to take for to implement VAT.
There aresome long-term actions which business has to take before implementation of VATfor system determination, contractual, processand arrangements as ready to go. Instantly random some actions are:Ø Accordingto GCC assess VAT review smart review reading, assessment tool, as forconsidering everything for financial VATimpact, through accounting and staffing process. The Saudi government has to setroadmaps before implementation early 2018 and to submit VAT returns developimportant resourcing plan work. Ø DifferentSaudi business and industries have business authorities lobbying for VAT legislation.Business has to map the footprint transaction to determine the VAT liabilitiesFuture and compliances duties are simplycovered.Ø Updatingand reviewing the contractualpreparations with suppliers and customers to find out every part as per wellaware of its responsibility foraccounting and paying VAT. Ø Haveto include proper questions in thecontracts and implement change towardscontractual terms.
Long-term actions:Ø Haveto review the system abilities to meetthe required standard of local authorities tax, specifically towards invoicingand reporting. Ø VATpolicies introduction and documentation, controls, and process as per accountreceivable and payable functionsØ Transitionperiods planning can be possible have system determinationwhich is capable of recognizing more thantax rates on standard bases. Ø Enhancementof supply change with the purpose of adverse VAT reduction on the impact of cash flow.Ø MinimalVAT determination as leakage have to restructureØ VATimpact understanding on the base forworking capital and pricing requirements.
Ø Forbusiness case should be secure budget and IT system and change as per VATchanges.Yes, every business sector has some concerns and uncertainty issue as per VAT implementation, but there is no reason to delay theVAT implementation dates for this they have to set readiness steps.Well-prepared readiness steps are very important as liabilities for VAT arenormally self-assessed, with different errors as per different penalties andtime taking with respect to local authorities of tax, or not good, can become areason to disrupt the business. Business has to set early with tax team andidentify and claim important resources Saudi VAT local considerationsEvery member of GCC has unique business and tax style.
Different ways canbe taken into consideration to change local VAT law to mirror local circumstancesas including:Ø Thescope of relief and exemptions as per VAT treaty limitations.Ø Freetrade zones VAT applications, as all free trade zones are treated as equallyor not and according to supplies how VATapplication is going to take place int, out, and in between free trade zonesbecause VAT treaty does not directly addressthe free trade zones. Ø Toaddress the Islamic finance whetherdifferent rules develop or notØ Temporaryemployee’s treatment for employees benefitsaccording to VAT implications. Ø Fromwhere to start low rate too much extentpotential to maintain the VAT rate and increase it. Associatedrisk if VAT goes wrongVATreputationalØ Highpressure due to moral and legalrequirement to pay right tax at right time. It alldepends on business to pay the rightamount of tax at the right time and take it as tax obligations to payit.Ø Tonot understand this and fail to meet the tax obligationscan lead towards bad public perception issues and with authorities difficult to manage relationships.VATOperational Ø Thereshould be status quo for tax implementation as per operational imperative.
Ø Disturbanceof obtaining to pay and sell to obtainprocedures will provide an increase tokey operational problems with logistics incapable to import goods, salesincapable to increase invoices. VATFinancial Ø Businessas per the VAT is depended on theundertake preparation, tax costs absolute and create cash0flow which isconsiderable. Ø Furthermore, to sell goods and servicesincapability as per implementation failure, on time important changes canbecome a reason for huge shortfalls in revenue.Ø Financialerror penalties can change from tax authorities can be high. VAT is generally a consumption of the goods and services andmeasured in the form of value addition in goods and services. In simple words,this tax is bear by the end consumers.
For economic development, indirecttax plays a significant role in anycountry through consumption and productionrate. Gulf Cooperation Council region members are recommended to implement VAT system in a properway to all the member’s countries, forthis all countries sign a treaty toimplement this system. It is not compulsory to follow a rule of thumb to the implement VAT, the easy country canmodify the VAT implementation treatment according to their country supplies.After signing the treaty, the Saudi government has started working on thissince 29 August 2017 and on their public consultant portal, they published VATimplementation rules and after signing the treaty, Saudi Arabia has aimed to implement the VAT system until early 2018. According to the research question, to examine the VAT implementation in the services sector (healthcare and education) onSaudi economy. Saudi Arabia is going to implement it and already starting working on it. After doing the detailed analysis of VAT impact on the servicesector (healthcare) the summing up points has a verysignificant impact on the Saudi economy. VAT popularity is due to administrative advantage.
Through credit method, it is very easy to get access the firm tax liability.Service sector’s return can easily cross-checkunder this method. Generally, VAT is to be natural for allocation of business productionforms resources but sales tax encourages production integration vertically thus to evadethe intermediary taxes and sales to get a competitiveadvantage. As for a bicycle factory who is manufacturing own rimsand steel pipes etc., paid less turnover as comparedto others which go to purchase this material externally.
But in theVAT system, make them neutral theintegration of the process and make them able toadopt that production form which is more suitable for the economy. VAT is more efficientbecause healthcare sector is in the lossthey cannot exempt it from its taxliability. They are not paid tax on profit but on the produced value. So this can improveperformance and cost production can reduce. By VAT a uniform tax system cannot apply, some goods can enjoy zero-rate and some tax exemption and it is practically applicable too in VAT system. Multiple rates are not applied to VAT system. For VAT system,it is easy to accommodate the multiple tax rate.
All the significant points give a greateffect on VAT administrative flexibilityand easy to modify according to differentpolicies and authorities. VAT implementation canhelpful the Saudi government more accountable and public image of governmentcan improve. One of biggest advantage Saudi government can take is one moresource of income which can lead towards more efficiently spend on socialwelfare of society. VAT in Saudi can helpful to meet the internationalstandards through government finance statistics requirements. Tax revenue of in2015: VAT revenue in KSA estimation 5.
2RecommendationsØ VATimplementation has to be done in proper way, more information has to includeand share with all companies levelsØ Saudigovernment also share their experience which can helpful for future and avoidmisinterpretationsØ Wholeservice sector have to clear regarding the process of VAT system implementationØ A number of step VAT should be implemented rather than just one push.Ø Saudicitizens have to aware from VATimplementations and have to prepare for this change.Ø The main purpose of the VAT is to support Saudi economy and alwaysconsider this purpose of implementing VAT on all levels.