VAT on cars has raised quite a concern for automotive industry across Gulf States. Already dealing with excessive inventory of vehicles, auto dealers will now have to pay value added tax (VAT), taking effect from January 2018. Consequently, this year may bring a flurry of activities in auto markets before car prices go up and demand goes down.
For auto sectors across UAE and GCC (Gulf Cooperation Council), 2016 proved to be a challenging year due to overstock of used vehicles and decreasing demand on new ones. It is presumed that auto dealers will face the difficult situation this year as well. With implementation of VAT, the cost of living will rise and buyers may not be willing to pay VAT on cars, which in turn will decrease the demand of automobiles.
On top of that, increasing number of manufacturers in the auto industry has raised the competition to the next level, hence decreasing margin on cars specifically on luxuries SUVs and sedans. As a result, car dealers with the support of banks are trying to attract customers with special offers such as discount on new cars, low maintenance cost, higher loan values and free insurance for the first year.
Effects of VAT on Automotive Industry Before Implementation
Implementation of VAT will impact the auto markets in both short and long terms. In the long term, there will be a rise in car prices, as dealers will have to pay VAT on car sales. In the short term, buyers will try to purchase vehicles before VAT to avoid paying VAT on cars bringing marginal rise in demands of vehicles. To dispose of pre-owned vehicles, car traders will entice customers with special offers toward the end of the year to bring in high sales profit before the year ends.
According to Finbar Sexton, EY Mena Indirect Tax Leader, introduction of VAT on January 1 2018 will bring a significant shift in the dynamics of auto industry for both consumers and dealers. The consumers will be mindful of rising cost of products before VAT implementation, which will automatically increase the demand of luxurious goods and automobiles.
He further said consumers usually replace their cars with new models before or after the year ends, which pitches the sales higher for dealers. This year consumers will want to replace their cars with new models to avoid paying extra 5%, as rising demand of cars will provide dealers an opportunity to sell as many cars as possible before the year ends. Dealers also wish to evaluate sales campaigns to get rid of existing inventory of new and pre-owned cars before introduction of VAT.
Effects of VAT on Automotive Industry After Implementation
Implementation of VAT in 2018 will bring some challenges to businesses operating in this vast auto industry. They may have to face demanding concerns like logistics, work capital cash flow, pricing and demanding, alternate market and inventory handling.
Auto industry specifically will have to be careful of tax evasion, as it can attract the attention of tax authorities.
Most importantly, other concerns for automotive industry include importation of vehicles, hire and leasing of motor vehicles and margin scheme of secondhand vehicles. It is to be noted that the purchase of the pre-owned vehicle might have a different VAT rule compared to buying a new car. This difference might be owing to the non-recoverable VAT already paid at the time of first purchase of the car.
An optional scheme might be used to avoid ‘tax on tax’ cascading effect. This scheme is commonly used in other countries and would possibly be introduced in UAE as well.
Answers to all these concerns can only be found after the publication of GCC framework for VAT, which will clarify the operational purpose of both local and imported vehicles. Even after going over all the concerns, it is expected that the automobile industry will find new ways to adapt to the change and would continue growing at a good pace.