The UAE’s auto sector, which is currently facing multiple challenges with excess inventory, is gearing up for the new VAT era with a cautious outlook. Stakeholders believe the final legislative framework for value added tax (VAT) could give some clarity for efficient operational purposes, both for local and imported vehicles.
“There is excess inventory, consequently supply far exceeds demand. Hence, retail prices are under pressure that is seriously hurting margins and operational profitability. One is likely to see this trend continue for most of 2017. We expect recovery to start by Q4 2017, by which time supply and demand are more or less in balance, provided there are no unforeseen shocks and oil prices stabilise at an acceptable level. Introduction of VAT and its impact is still not clearly known, hence that too needs to be considered,” said K. Rajaram, chief executive officer, Al Nabooda Automobiles, UAE, in a recent Alpen Capital’s report on the GCC automobile industry.
According to Alpen Capital, the number of passenger cars in use in the GCC is expected to grow at a five per cent CAGR from an estimated 10.3 million in 2015 to 13.2 million in 2020.
“There will be both long and short-term effects of VAT on the automotive industry. In the long term, prices will be affected as VAT will be payable on new car sales. In the short term, this may well lead to a spike in demand before VAT is introduced as buyers try to beat the price rise. This could provide a boost to the motor trade towards the end of 2017 and there may be some attractive offers for buyers as traders try to make the most of the opportunity. All of this might, in turn, have an impact on second-hand sales, with a glut of pre-owned vehicles hitting the market,” said Brian Conn, partner at BDO Tax Advisory services.
Fears of VAT affecting vehicle sales persists among industry players. Osman Abdelmoneim, general manager, AGMC, said: “The current automotive market is focused on tactical offers and we do not expect that to stop in the immediate future. With regards to VAT-related plans, we are still waiting for the final framework for implementation to be announced by the government. We anticipate that some customers will prepone their vehicle purchasing decision to make use of the five per cent savings.
“This would apply predominantly to private customers as corporate customers are likely to be able to recover the input VAT. The implementation of VAT is a natural part of any sustainable economy’s development. We do not anticipate any noticeable change in demand once VAT is embedded into the pricing mechanism of the vehicles.”
Industry stalwarts have and will deal with many areas of concerns. Like in other tax regimes, there will be import VAT when a vehicle is imported into the region by the authorised dealer registered for VAT. The import VAT is to be paid in cash at the first point of entry in the GCC before it is made available for free circulation. The tax paid at the time of import can be adjusted (input tax credit) in a normal scenario against the VAT recovered from the business customer (B2B) or end-customer (B2C) on a subsequent sale.
Finbarr Sexton, EY Mena Indirect Tax Leader, said the introduction of VAT on January 1, 2018, in the UAE would create some interesting market dynamics for auto dealers and consumers in the period prior to and after implementation. Consumers will be keenly aware of the increase in the pricing of products post VAT implementation. The cost of products will increase by five per cent for consumers and this price inflation will influence demand for high-value luxury goods and automobiles.
“Traditionally, car dealers experience a significant spike in sales as consumers replace their cars with new models before and after year-end. Consumers will wish to advance their purchases of cars to a November/December 2017 to avoid the five per cent price increase due to VAT. Automotive dealers will, in turn, want to sell as many cars prior to year-end to consumers at pre-VAT prices. Additionally, car dealers will also wish to assess sales campaigns aimed at reducing inventories of 2017 models and pre-owned cars in anticipation of the introduction of VAT,” added Sexton.