UAE- Looking back, you win some, you lose some

(MENAFN- Khaleej Times) The UAE recently issued the VAT law which proposes a unified rate of five per cent on most goods and services with effect from January 1, 2018, with some exceptions for zero rate and some exemptions.

Saudi Arabia and the UAE have taken the lead by issuing respective VAT laws during the third quarter of 2017. Saudi and UAE authorities have issued the executive regulations. This provides more clarity on the status and impact on most free zone entities across the UAE and some specific implementation guidelines and transition rules. This is of great significance for the overall implementation of VAT legislation in the region.

The other four GCC countries have decided to defer it to the middle and or end of next year or to the following year (2019) as their preparations are still in process. This could create some short-term uncertainty for cross-border trade, some arbitrage for diversified businesses with operations spread across other Gulf countries, but which is now unavoidable.

Impact on the industry

VAT provides a unique opportunity against a tough economic back drop. It provides a reality check (i.e. current state of excess inventories) and a control check (i.e. how to address the market conditions despite challenges). The focus should be on seeing it as an opportunity to restructure the business model and build efficiency in operations.

The GCC automotive industry has been going through some very challenging times since 2015 and during the current year as well, with marked slowdown in offtake of passenger cars, especially luxury cars and demand for commercial vehicles as well. Plus, there is a large glut in the second-hand markets across the region in all market segments.

Thus, it's been a mixed year overall in 2017, with some business segments e.g., those deployed in the construction, logistics, education sub-sectors performing better than others. Globally, there is overcapacity of around 20 per cent in the manufacturing sector, which does not help at all.

Market disruption

The sector is also likely to see a major disruption. With more focus on lower emissions norms as per Euro IV framework applicable in April 2018, autonomous vehicle technologies, electric and hybrid cars are likely to see more demand. It's well and clearly a buyer's market with manufacturer and dealer margins under sustained pressure from this onslaught, combined with a subdued market, scarce cash and liquidity conditions for companies.

The trend is expected to continue due to overall subdued demand for new vehicles and oversupply of pre-owned vehicles which are depressing the sentiment, prices and margins for original equipment manufacturers, dealers and the end consumers are also affected by lower re-sale values. With the expected higher growth in the non-oil GDP growth in UAE next year, things may improve in the middle of next year.

Individual and commercial buyers and fleet operators - car, buses and commercial truck fleet rental firms - are becoming more discerning while making large inventory decisions by deferring timing of purchases, in anticipation of lower prices, expectation of more freebees, volume discounts and more innovative promotion schemes. This is especially true for luxury, SUVs, large and midsize segments as well.

The market response has been aggressive. Major dealers are backed by banks who continue to lure customers with attractive discounts, offers on new purchases with longer service and maintenance contracts, higher loan values up to 100 per cent with very attractive interest rates, free insurance for the first year, tinting, rust proofing, etc.

There is still no significant manufacturing taking place in the region, barring a few truck and bus components assembly plants. The region relies heavily on vehicle imports from Japan, China, India, the US, Australia and Europe to fulfill demand.

Changing market dynamics

New upstart players such as Sellanycar.com, Dubicars.com and Dubizzle, etc., have entered the market for trade in second-hand cars and are expanding rapidly. Diversification is key for all players, especially dealers. They have diversified into valued-added services by facilitating higher financing, promoting attractive insurances, longer warranties, car accessories, co-brands, to name a few.

Meeting operational VAT challenges and a pro-active response strategy will be essential for the last quarter of 2017. Companies will need to be cautious in their strategy while predicting demand and planning to meet additional demand, e.g. for logistics, additional staff and warehousing, leading up to January 1, 2018.

Some estimates point to a 20 to 30 per cent volume increase in auto sales compared to the same period of 2016 before the imposition of VAT. Some local customers and dealers may also attempt to benefit from arbitrage due to the late imposition of VAT in other countries like Oman with price advantage, though it looks difficult to sustain for long due to the import VAT rules as envisaged under the new law.

However, there is also the 'business dilemma' whether to pass on the full five per cent VAT to customers or absorb it partially.

Winners will be the ones that have a well thought-out marketing strategy which must be focused on meeting demand in a most cost-effective manner. This also involves having up-to-date VAT-enabled systems and ensuring the right inventory of models, especially of popular brands, is stocked in right quantities and at the right time to attract customers.

The writer is partner - corporate finance and VAT at Crowe Horwath, Views expressed are his own and do not reflect the newspaper's policies.

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