IMPACT OF VAT ON CAR INDUSTRY
Purchasing a car in UAE was considered as a strenuous task as it did not only relate to the cost of the car. It also included other expenses such as fuel, insurance, maintenance repair, parking etc. The introduction of VAT @ 5% on January 1, 2018, had made this task more troublesome as it increased the cost.
The article below proceeds with explaining the impact of VAT on the car industry.
WHAT HAS BEEN THE IMPACT OF VAT ON CAR INDUSTRY
1. COSTING OF BUYING A CAR
The application of VAT on a car depends upon the person from whom it is being purchased. It the person is purchasing a brand new car from the agency or a pre-owned car registered under the agency or dealer, he will be required to pay VAT @5% on the car’s value. This would have an impact on the car’s cost depending upon the actual price. Whereas the buyers of used cars which are registered under the original owners but are being sold through dealers will be required to pay 5% on the profit made by the car dealers. Thus a person will not be required to pay any tax on purchasing an old car.
2. VAT ON CAR LOANS FROM A BANK
5% VAT is applicable to the loan processing fee which is charged by the banks. This fee ranges from Dh 500-Dh 1500. On the other hand, VAT does not apply to car loan installments and the associated interest rates.
3. OTHER ANNUAL COSTS
Car license registration and inspection services do not attract any VAT.
4. CAR INSURANCE AND RENEWALS
The VAT is not applicable on car license registration and inspection fees. The prices of such have been increased. Car license renewal fees were increased by 17% from Dh 300 to Dh 350. Inspection fee, on the other hand, was increased by more than 20% from Dh 140 to Dh 170.
5. FUEL RELATED COST
Applicability of 5% VAT on petrol, diesel, and gasoline has increased the consumption cost of vehicles. This has also lead to an increase in the cost of petrol and diesel cars. Imposition of value-added tax on commercial and residential parking services adds to the cost.
6. VEHICLE REPAIR AND SERVICING
5% VAT is imposed on regular service and repairs. This also includes the car wash and oil change at the service centers. Purchase and servicing of spare parts are also included under VAT.
HOW IS THE TAX CALCULATED FOR THE SALE OF USED CARS?
The Federal Tax Authority in its awareness session has clarified that profit margin scheme is applicable on the goods which have been previously subject to VAT before the supply in question. For the sale of used cars, the tax would be required to be calculated on the profit margin and not on the actual sale price. For example : Arham owns a used car which amounts to AED 150,000. He then decides to have the car undergo some repairs which cost him AED 3,000. There is an addition of profit margin @ AED 7,000. 5% tax would be calculated on the profit margin which would give VAT of AED 350.
With the imposition of VAT @5% on most of the aspects related to the car industry, the car industry has witnessed a noticeable dip in the sale of cars.