With the final approval and signing of GCC united VAT Agreement by all the member countries, the taxation system VAT is all set to be implemented in GCC Member States. It is expected to be implemented by 2018 and the formulation of laws and regulations in each of the member countries are some of the major immediate steps involved in the implementation of VAT.

While these countries are preparing for implementation VAT, what does it implies to the businesses, for whom the subject Indirect Taxation is new although it exists in certain business-specific scenario. No doubt, in several ways the business will be impacted. The reason being, indirect tax ‘VAT’ being a transaction-based tax, which requires you to ensure that every transaction recorded are VAT complaint. To ensure compliance, it is imperative for businesses to understand what is VAT? How does VAT system work? Let us discuss.

What is VAT?

Value Added Tax (VAT) is the tax levied at every level of value addition done to the product across the supply chain. It is levied at every point of sale from manufacturer till it is sold to an end consumer. This achieved by allowing tax paid on purchase known ‘Input Tax Credit’ or also known as ‘input VAT’ to be adjusted with the VAT collected on sales knows as ‘Output VAT’. Ultimately, the entire tax is paid by the consumer.

How does VAT system work?

VAT is a consumption-based tax with the provision to allow Input tax credit -Tax paid on purchases to be utilized or set-off against the VAT liability Tax collected on Sale. If there is any balance liability after adjustment, the same needs to be paid to the government.

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