Merits any input taxes paid or set off credit.

Merits and
Demerits of VAT

Advantages
and Disadvantage of VAT

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A.    Advantages of VAT

1.      VAT
popularity is due to administrative advantage. Through credit method, it is very easy to get access the firm
tax liability. Firm return can easily cross-check
under this method. Generally, VAT is to be natural for allocation of business production
forms resources but sales tax encourages production integration vertically thus to evade
the intermediary taxes and sales to get a competitive
advantage. As for a bicycle factory who is manufacturing own rims
and steel pipes etc, paid less turnover as compared
to others which go to purchase this material externally. But in the
VAT system, make them neutral the
integration of the process and make them able to
adopt that production form which is more suitable for the economy.

2.      It is also neutral for factors costs due to all value added
taxes. On the opposite side, current taxation systems of a corporation do not
encourage the capital equity use and disciplines in profits, VAT does not delay
the technology adoption which is capital intensive.

3.      It also evades the cost cascading effect but sales tax can
lead to tax liability compounding but VAT not.

4.      Indirect
VAT advantage is its impartiality with respect to the allocation of the resource.

5.      VAT
is lesser evasion is one of biggest advantage. Firstly, sales tax effect is
cascading so, which is imposed on gross value and not allowed any input taxes
paid or set off credit. Results are
consumer’s prices can raise the higher amount of
accumulates to the exchequers in a way to get revenue. Secondly, production can
reduce due to VAT for industries and give space to refund system and not put
the burden on exports. Thirdly, 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 VAT is a less avoidable tax.

6.      VAT
system 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 separate
the tax from production cost but not for
other taxes which gives the mix results for production cost. Trade tariffs also
consider the VAT refund because of this
practice can encourage exports.

7.      VAT
is more efficient because is a firm is in the loss
they cannot exempt it from its tax
liability. They are not paid tax on profit but on the produced value. So this can improve
performance 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 great
effect on VAT administrative flexibility
and easy to modify according to different
policies and authorities.

B.     Disadvantage of VAT

1.      The first disadvantage of the VAT is not suitable for developed countries as
it becomes so much popular (Hlbhiatia, 1996).

2.       It is a complicated
system and suitable for those government who are honest for cross-checking and
check and balance on production activities and every firm tax liability. So it
is very important for economic and financial structure
and habit for to keep proper accounts for every firm.

3.      For
proper VAT system, there is a need for cooperative taxpayers. Every firm has
to calculate its own liability for tax, paid and unpaid tax. Once, if the seller feels
administrative authority is not properly aware
of the tax system and not doing cross-checking,
they can go for false purchase invoice and this can give space to as common
practice for others too.

4.       VAT rate is too much high, at the end there
will be less tax revenue over the sales tax collection.

5.      If
the taxpayer is fully honest but this
system can force them to maintain the costly account and elaborate. It
can be not economical for smaller firms.

6.     
Account maintaining can be difficult,
cross-checking and evasion tax can stop
if there is some exception to this system and different tax rates. It is not acceptable to assume such government or
administrative authorities who have such tax system which is neutral claimed system for own distributive and allocated
effects. VAT system cannot ignore the wealth and income inequalities, the non-competitive
market, and capital formation need
through different or selective tax rate system.and once administrative adopt such system, there can be pressure for tax exemptions and zero-rates. This can leads
towards the failure of actual decisions
and not get the objectives.

7.      VAT
includes the efficiency, in shortage economy like price rise and speculative hoarding can raise such practices. According to the seller market, both seller and producer
have the intention to not increase efficiency and cost reduction since the
selling of goods irrespective of high price and quality. All in all, VAT system
needed very high efficient administrative authorities in the competitive
market. In 1977 DTIC (direct taxation inquiry committee) check the VAT system feasibility and come up with the
conclusion there is a caution to adopt such form of tax. They concluded such
adoption has to be done on an experimental basis in a manner for limited
manufacturing industries (Ibid).IntroductionSpecifically, the impact of
VAT on an economy check through the country GDP and VAT series tax. But in the
context of Saudi Arabia VAT tax will be implemented from the first the quarter
of 2018. So this is not possible now to study this relationship due to the
limited time frame. In this study, the main focus will be to check before and
after VAT implementation in the services sector
((education and healthcare) on Saudi economy. For this study, data will be
obtained from different recent published articles, journals and compare it with
the 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 methodology
as research a method in a way to find the perfect
solution. Furthermore, it can be defined as principles, rules, and method which is applied to a particular
research. In this chapter will introduce the methods which are going to use for this project for data
collection as per VAT impact on Saudi service (healthcare) sector. 3.2 Research Question·        
What
is the impact of VAT implementation in the services
sector (healthcare) on Saudi economy?3.3 Research MethodologyFor this study, data will be
obtained from different recent published articles, journals and compare it with
the other countries economy. VAT impact on Saudi service (healthcare) sector. Furthermore, this study is going to collect
data from the qualitative method, as VAT
is totally new concept for Saudi Arabia, so better way to apply qualitative
approach. This method more helpful to get
more 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 challenges
and opportunities for better understanding of the topic. Moreover, use of different articles, publish
journal and interview with different individuals to reflect the qualitative
methods. As interviews give real feeling
regarding the topic for better results.3.4 Population and SampleThe main method is
used as recent publish articles, journals, and
interviews. All interviews are done at King
Abdulaziz University, Faculty of Law. Different lectures from law faculty and
students of law final year are taken as a
sample for this project.3.5
Data collection instrumentsAs per the
topic VAT impact on service sector in Saudi Arabia use interview and publish
articles 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 for
data collection, comparative results analysis between data collection from publishing articles and interviews. 3.6 Reliability
and Validity To collect data
form qualitative method is more difficult when trying
to set reliability and validity of data.
As researcher mostly depends on
observation and data interview to data collection. Moreover, a researcher shows opinions from interviewees and
transfer the data for facts and analyze
the data for better results. For this project,
the true picture is taken as to use data collection in the more efficient way.3.7 Methodology
summaryThis project focus on VAT impact on
service sector in Saudi Arabia through recent publish articles given online
data and qualitative method. Results and
Discussion4.1 IntroductionData was collected from available
publish articles, online data, and
interviews for results. This section will discuss the results and provide
information regarding the topic. 4.2 Data analysis
VAT in Saudi ArabiaGulf corporation council
member states representatives signed on the VAT treaty, and confirm to
introduce the VAT system formal way in
six states. This treaty is considered as
a basis for domestic VAT implementation for every member by specifying
certain values through permitting the
Saudi government to select different treatment of VAT as per supplies. VAT will
impact mostly industries sector, but particularly impact the following areas
too: Ø  Financial
services sector.Ø  Industrial
and 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 is
imposed on gross value and not allowed any input taxes paid or set off credit.
Results are consumer’s prices can raise the higher
amount of accumulates
to the exchequers in a way to get
revenue. 2nd reason, production can reduce due to VAT for industries
and give space to refund system and not put the burden
on 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 VAT
is a less avoidable
tax. This is all because of
tax is divided into different parts and for any firm tax, avoid can be reduced. If
any business minimizes its output, it can
be easily caught from the business buying output disclosures. Generally, VAT
can take away all the above mention reason for the need of VAT and help to
control the economic stability and avoid
distorting. Implementation time of VATALL GCC members will go
to implement VAT locally in the early month that 1st January 2018 or
30 days next to the publication date. It consists
12 chapter with 83 articles on the base VAT draft.Tax ApplicationThe standard rate for VAT is 5% until unless any goods or services
charged as exempt or zero-rated. As per the rules,
Saudi Arabia has the flexibility to select the specific provision of goods or
services to consider as zero-rated or exempt, although required as exempt or
zer0-rated to some supplies. Mandatory,
zero-rated examples are medicines, goods exports, transportation over
cross-border. Saudi Arabia has flexibility regarding towards the supplies
treatment of some food items, oil sector, commercial transportation on the base
of either take it as standard-rate of zero-rate, the standard rate is 5%. Other
sectors like real estate, education, healthcare and local transport they have
flexibility and can opt between zero-rated and exempt treatments. Moreover,
financial services providers have to be exempt and can take the flexibility of
these services. From all most important point is to make a proper distinction between
exemption and zero-rate; for both cases, VAT has not be accounted on the
supply, an exempt supply is not normally allowed to recover input VAT over
these 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 VAT
treaty every GCC member is committed to implementing
5% VAT, but allow to do some exemptions and zero-rates. As per the rules, Saudi
Arabia has the flexibility to select the
specific 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 proper
distinction between exemption and zero-rate; for both cases, VAT has not be
accounted on the supply, an exempt supply is not normally allowed to recover
input VAT over these supplies. Zero-rated supplies normally allowed to recover
input VAT. VAT is significantly less the average OECD VAT rate which is about
19%. As per IMF estimation, although this modest rate has more expectation to
collect revenue in the GCC and Saudi Arabia for VAT between 0.8% to 1.6% of
GDP. 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 number
of actions which Saudi government has to take for to implement VAT. There are
some long-term actions which business has to take before implementation of VAT
for system determination, contractual, process
and arrangements as ready to go. Instantly random some actions are:Ø  According
to GCC assess VAT review smart review reading, assessment tool, as for
considering everything for financial VAT
impact, through accounting and staffing process. The Saudi government has to set
roadmaps before implementation early 2018 and to submit VAT returns develop
important resourcing plan work. Ø  Different
Saudi business and industries have business authorities lobbying for VAT legislation.
Business has to map the footprint transaction to determine the VAT liabilities
Future and compliances duties are simply
covered.Ø  Updating
and reviewing the contractual
preparations with suppliers and customers to find out every part as per well
aware of its responsibility for
accounting and paying VAT. Ø  Have
to include proper questions in the
contracts and implement change towards
contractual terms. Long-term actions:Ø  Have
to review the system abilities to meet
the required standard of local authorities tax, specifically towards invoicing
and reporting. Ø  VAT
policies introduction and documentation, controls, and process as per account
receivable and payable functionsØ  Transition
periods planning can be possible have system determination
which is capable of recognizing more than
tax rates on standard bases. Ø  Enhancement
of supply change with the purpose of adverse VAT reduction on the impact of cash flow.Ø  Minimal
VAT determination as leakage have to restructureØ  VAT
impact understanding on the base for
working capital and pricing requirements.Ø  For
business case should be secure budget and IT system and change as per VAT
changes.Yes, every business sector has some concerns and uncertainty issue as per VAT implementation, but there is no reason to delay the
VAT implementation dates for this they have to set readiness steps.
Well-prepared readiness steps are very important as liabilities for VAT are
normally self-assessed, with different errors as per different penalties and
time taking with respect to local authorities of tax, or not good, can become a
reason to disrupt the business. Business has to set early with tax team and
identify and claim important resources Saudi VAT local considerationsEvery member of GCC has unique business and tax style. Different ways can
be taken into consideration to change local VAT law to mirror local circumstances
as including:Ø  The
scope of relief and exemptions as per VAT treaty limitations.Ø  Free
trade zones VAT applications, as all free trade zones are treated as equally
or not and according to supplies how VAT
application is going to take place int, out, and in between free trade zones
because VAT treaty does not directly address
the free trade zones. Ø  To
address the Islamic finance whether
different rules develop or notØ  Temporary
employee’s treatment for employees benefits
according to VAT implications. Ø  From
where to start low rate too much extent
potential to maintain the VAT rate and increase it. Associated
risk if VAT goes wrongVAT
reputationalØ  High
pressure due to moral and legal
requirement to pay right tax at right time. It all
depends on business to pay the right
amount of tax at the right time and take it as tax obligations to pay
it.Ø  To
not understand this and fail to meet the tax obligations
can lead towards bad public perception issues and with authorities difficult to manage relationships.
VAT
Operational Ø  There
should be status quo for tax implementation as per operational imperative.Ø  Disturbance
of obtaining to pay and sell to obtain
procedures will provide an increase to
key operational problems with logistics incapable to import goods, sales
incapable to increase invoices. VAT
Financial Ø  Business
as per the VAT is depended on the
undertake preparation, tax costs absolute and create cash0flow which is
considerable. Ø  Furthermore, to sell goods and services
incapability as per implementation failure, on time important changes can
become a reason for huge shortfalls in revenue.Ø  Financial
error penalties can change from tax authorities can be high.

 VAT is generally a consumption of the goods and services and
measured in the form of value addition in goods and services. In simple words,
this tax is bear by the end consumers. For economic development, indirect
tax plays a significant role in any
country through consumption and production
rate.  Gulf Cooperation Council region members are recommended to implement VAT system in a proper
way to all the member’s countries, for
this all countries sign a treaty to
implement this system. It is not compulsory to follow a rule of thumb to the implement VAT, the easy country can
modify the VAT implementation treatment according to their country supplies.
After signing the treaty, the Saudi government has started working on this
since 29 August 2017 and on their public consultant portal, they published VAT
implementation 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) on
Saudi economy. Saudi Arabia is going to implement it and already starting working on it. After doing the detailed analysis of VAT impact on the service
sector (healthcare) the summing up points has a very
significant 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-check
under this method. Generally, VAT is to be natural for allocation of business production
forms resources but sales tax encourages production integration vertically thus to evade
the intermediary taxes and sales to get a competitive
advantage. As for a bicycle factory who is manufacturing own rims
and steel pipes etc., paid less turnover as compared
to others which go to purchase this material externally. But in the
VAT system, make them neutral the
integration of the process and make them able to
adopt that production form which is more suitable for the economy.

VAT is more efficient
because healthcare sector is in the loss
they cannot exempt it from its tax
liability. They are not paid tax on profit but on the produced value. So this can improve
performance 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 great
effect on VAT administrative flexibility
and easy to modify according to different
policies and authorities.

VAT implementation can
helpful the Saudi government more accountable and public image of government
can improve. One of biggest advantage Saudi government can take is one more
source of income which can lead towards more efficiently spend on social
welfare of society. VAT in Saudi can helpful to meet the international
standards through government finance statistics requirements. Tax revenue of in
2015:

VAT revenue in KSA estimation

5.2
Recommendations

Ø  VAT
implementation has to be done in proper way, more information has to include
and share with all companies levels

Ø  Saudi
government also share their experience which can helpful for future and avoid
misinterpretations

Ø  Whole
service sector have to clear regarding the process of VAT system implementation

Ø  A number of step VAT should be implemented rather than just one push.

Ø  Saudi
citizens have to aware from VAT
implementations and have to prepare for this change.

Ø  The main purpose of the VAT is to support Saudi economy and always
consider this purpose of implementing VAT on all levels.