VAT adjustments: Who wins and who pays the bill?VAT adjustments: Who wins and who pays the bill?

Will contracting companies waive the increased profitability resulting from the contracting activity being subject to a 14% value-added tax (VAT) with deductions for inputs, instead of 5% without deductions? Or will real estate market prices rise by up to 9%?

As part of the state's efforts to encourage investment and boost the economy, the upcoming amendments to the VAT law aim to expand the tax base and address some of the existing distortions in the current law, most notably the imposition of a flat tax on contracting activity. This represented a fundamental flaw in the legal fairness prior to the proposed amendment.

Imposing a flat tax means that the legislator does not consider the circumstances of the project, whether the value of the tax paid on its inputs is greater or less than the tax collected from the owner. Therefore, in an effort to achieve justice and stimulate contracting activity, the state has granted contracting companies the right to deduct inputs to encourage and support this vital activity.

However, since VAT is an indirect tax, its burden will be directly passed on to the end user of the good or service. In the case of contracting activities, the most important user in the loop is real estate investment companies, which the law will not allow to deduct the tax on contracting services. They will therefore be forced to absorb it into their costs. This will necessitate re-pricing to pass the estimated 9% increase on to the end consumer, i.e., the buyer of the real estate unit.

The irony is that this does not conflict with the fact that contracting companies will achieve a reduction in their costs—and thus an increase in their profitability—but at a rate lower than the value of the increase in the final product (the property). This stems from the fact that the new law gives contracting companies the right to deduct their inputs instead of charging them to their costs, as was previously the case.

The question here arises: Will contracting companies be satisfied with their current profit and reduce their prices? Or will they seek to benefit from this savings alone without sharing it with real estate investment companies, thus placing the entire burden of this amendment on the shoulders of the property buyer?

Simply put, the law has given contracting companies a breathing space for profitability, but at the same time, it has opened the door to price increases that citizens may bear unless the market intervenes with its balance sheets or the state intervenes with its regulatory tools.

The amendment is essentially positive and corrects a historical distortion, but it may raise a sensitive question: Who pays the bill? The answer... will be revealed by the market, and only the consumer will feel the difference.

To view the article in Al-Alam Al-Youm newspaper, click on the link.