How is VAT really going to impact the construction industry?

Posted on 10th October 2017 in Articles

How is VAT really going to impact the construction industry?

In three months from now, value-added tax (VAT) will be introduced in all six GCC countries. Contractors as well as other companies in the construction supply chain along with other sectors – will start to experience 5% VAT added to the their cost. How will this impact the construction industry? For Developers: VAT will take effect on all the supply and construction contracts resulting in an overall increase in construction costs as well as the cost of building materials. In addition to the 5% VAT charges, the cost of administration required and expense of guaranteeing compliance will also impact the business. This cost will pass on to the customers leading to an inflationary effect on the industry. For Contractors and Consultants:

They will pass on the additional expenditures to the project developer but they will need to factor the effect of VAT on their cash flow system. Contractors, consultants and suppliers in GCC countries have been struggling with late payments especially since mid-2014 due to tight liquidity conditions and a lack of funding from banks. Since VAT is payable within 30 days from the end of the quarter, companies would need to consider the cost of delayed payments on the cash flow and the cost of funding the VAT on time. The payment terms may need readjustments and also they may have to get their credit facilities with banks renegotiated.

Though the contractors and developers will feel the additional cost in the beginning, in the long term it becomes part of the business environment since most of the VAT cost of construction projects are fully recoverable.

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