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From burden to relief: VAT will help SMEs in the UAE get loans

SMEs have long suffered from a lack of bank loans, totaling less than 5% of total loans given out, with bank faith in these companies quite fragile.

Now, this could change, and the unlikely savior swooping in is none other than VAT.

VAT to the rescue

In a country dominated by SMEs, totaling 94%, only a miniscule percentage of these UAE enterprises has been able to secure bank loans in years past, in a region where lending to SMEs has been scarce.

Bank lending to SMEs totals below 5% of total bank loans assigned, Dr. Allen Baby, Faculty member at Emirates Institute for Banking & Financial Studies, has noted in an academic paper.

Now, Emirates NBD, a prominent UAE bank, has announced the launch of a new VAT-based enhanced loan solution for small and medium-sized enterprise customers.

The new loan program makes it easier for SMEs to apply for financing by providing copies of their VAT returns filed with the UAE’s Federal Tax Authority to serve as validation of business turnover and income.

This is a win-win situation for everyone involved, as banks acquire new customers, SMEs secure funding, and the country benefits from more transparency as businesses become more inclined to offer more accurate VAT return forms. Transparency also fosters a better reputation for the country as an entrepreneurial seedbed.

The new program will cover home loan, auto loan and business loan products.

READ: Bahrain VAT is here and with it a period of confusion and penalties

Tax still a stranger in the UAE, but a success  

In the UAE, VAT is still a relatively foreign concept, having only been implemented at the turn of the year in 2018. While early reports had shown initial difficulties among businesses in acclimating to the new legislation and achieving VAT compliance, the situation had drastically improved by the end of the year.

According to Mahmoud Bangara, Chairman of The Institute of Chartered Accountants of India (Dubai) Chapter, and as reported by the Arabian Gazette, business transactions have become more transparent as a result of VAT, and businesses are becoming more serious in complying with the procedures, requirements and regulations of VAT.

The Federal Tax Authority (FTA) announced last week that the number of businesses registered for value-added tax (VAT) exceeded 296,000 while 650,000 VAT returns were submitted in 2018.

As of November 18 of last year, the Tax Refund for Tourists Scheme went into effect, allowing eligible tourists to request refunds of the VAT incurred on their purchases.

Excise tax, on the other hand, has been active in the country since 2017, with the following rates in place:

-50% for carbonated drinks

-100% for tobacco products

-100% for energy drinks.

The FTA also introduced a new digital tax stamp scheme for tobacco products, which came into effect on January 1 of this year. The new scheme includes electronic monitoring of all kinds of imported, produced and locally traded cigarettes, from production to consumer, to ensure compliance with excise tax payments.

READ: Tourist tax refunds must follow 5-steps starting Sunday

VAT’s first year in numbers

The following are some key figures from VAT’s first year in 2018:

-296,000 businesses registered with VAT system

-176 Tax Agents were accredited

-122 freight forwarding companies were commissioned.

-Total number of queries answered by the FTA exceeded 453,500

-The FTA held more than 35 meetings with all business groups and representatives of relevant sectors.

-The FTA organised 90 seminars and training workshops, attended by approximately 28,000 experts from various sectors.

-The Federal Tax Authority was among the 8 most searched names in the UAE on global search engine Google in 2018.

READ: FTA: Tourists can begin reclaiming VAT as of November 18