IMPACT OF VAT ON BUSINESS
The input VAT will be calculated on the basis of Local Purchases, Imports and the GCC trade. The impact can be determined on the various components of the business including the impact on the cash flow and on the profitability of the business.
IMPACT OF VAT ON CASHFLOW
If we consider the local and the GCC suppliers are TAXABLE PERSONS, and the UAE Business is paying VAT on all of its purchases. The Import VAT will be payable before the products/goods are released to the business. The credit terms with the local and GCC suppliers are 3 days, as business wants to avail the discounts on its purchases.
On average business sell all of its purchases in 25 days and provide a credit period of 35 days to its customers.
Using the above information the cash cycle of the business can be calculated as following
Cash Cycle = 35 days + 25 days – 3 days
The average cash cycle of the business is 57 days, which means the business is recovering its cash within 45 days.
Because of the implementation of VAT in UAE, business has to pay 5% on all of its taxable purchases and collect 5% on all of its taxable sales.
If we consider, the business is dealing only with the taxable supplies with average sales revenue of AED4 million per month, and filing its VAT return monthly. On Average business has to pay AED200,000 to FTA as VAT on its purchases.
As the average cash-cycle of the business is 57 days, so there will be cash deficit of AED200,000 which business has to pay to FTA every month.