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Harry jonson

Impact On Hotel Industry Due To VAT In Dubai

4 min read

The Gulf Cooperation Council (GCC) has introduced VAT in Dubai from the very beginning of the year 2018 and since then, it has largely influenced the hotel industry in that region. As stated by the UAE Ministry of Finance, the VAT rate is 5% on the hospitality and leisure sector. Although it been month since the commencement of Value Added Tax service, it is still challenging for the entrepreneurs to determine the VAT treatment.

Challenges regarding Place and Time of supply!

Nowadays, technological advancement support tourists to reserve hotels, rooms, tours and packages over online. This, in reality, helps the H&L industry to evolve radically. However, it has made the task of identifying the exact service location and subsequent VAT treatment more complex. Alongside this, payment through net banking or credit/debit cards makes it more difficult for the traders to figure out the exact time of supplied services and the relevant tax determination. Calculation of VAT refund in response to this tax system is equivalently challenging for the businessperson.

Have a look at the confronts in ascertaining the VAT treatment –

*      Arrangement with tour operators: Since the introduction of Value Added Tax system, determining the correct VAT treatment on the transactions concerning to an agent is quite challenging. Usually, relationship between the customer and the travel agent largely influences the VAT treatment of these arrangements. The tax slab rate varies depending on whether the agent is intermediary or principal.

 

*     Pre-booking arrangements:

 

Often tourists prefer pre-booking arrangements in order to avoid unfavorable circumstances, later. However, this hardens the responsibility of travel agents, as they need to identify whether the deposits are “payment in advance” or it is “a security deposit”. If the deposited amount concerns to security purpose, the operators need to refund the amount at the end of the tour. Determining and calculating all these transactions is indeed a tough duty for the agents.

 

*     Cancellations and refunds:

 

In Hotel industry, it is a common scenario when the tourists cancel bookings or they do not turn up and demands for a refund. In these cases, the hoteliers charge a certain fee regarding the cancellations but, what does they offer in return! Well, there comes the challenge, as even a single dispute with the guests can generate a crucial situation for the hotel entrepreneurs.

 

*     Complementary ad hoc supplies:

 

For every agent, it is essential to maintain some ad hoc supplies in order to strengthen the relationships with the guests. The facilities include currency exchange, compensatory payments, recharge of telephone calls, and so on. However, services imply there is a VAT treatment and calculating the taxable amount on those services appears to be an extra burden for the tour operators.

 

*      Tour Packages: In general, the tour packages as offered by the foreign tour operators are the combination of several components viz. tour guiding, accommodation, transport, tour brokerage and so on. Thus, the travel agents need to determine the exact VAT treatment depending on all those components of each transaction. Even a minute faulty calculation can sour a good relationship between the tour operators and the customers.

 

*     Tips and service charges:

 

In the H&L industry, it is a common practice to charge an extra amount from the guests that gets divided among the workers as an incentive policy. These voluntary tips from the guests appear to be a token of appreciation for the rendered services. Well, this service charge does not subject to VAT treatment.

 

*     Accommodation policies:

 

In UAE, hotels usually offer 30 days short-term accommodation and 6-months long-term accommodation. In most jurisdictions, the long-term accommodations are exempted from VAT treatment whereas the short-term stays are taxable. This implies that the VAT incurred on general overheads and common costs are not fully claimable and needs to be apportioned.

Well, all this highlights the fact that VAT UAE is yet not a comfortable topic of discussion. Thus, every entrepreneur is up for a consultant and needless to say, it is obviously a wise decision.

Summary

Since the introduction of VAT in UAE, hotel industry has faced many challenges. Determining the exact VAT treatment has become a different chore in all.