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Representational image of cash theft.Pixabay

Dubai has planned to impose a new value-added tax (VAT) which will not only make money laundering more costly but compliance with the tax regulations will also leave a paper trail.

The United Arab Emirates (UAE) will commence the new VAT regulation from January 1, 2018, at the rate of 5 percent and other Gulf Cooperation Council (GCC) members which include Kuwait, Saudi Arabia, Oman and Qatar will also impose the VAT but a year later, Economic Times reported.

According to Economic Times, for years, paper transactions between the newly formed companies in UAE were shown as genuine business deals to legitimise undisclosed, untaxed income.

Soon after changing black money to white money, the funds collected were then parked with banks in Dubai or invested in other countries or would come back to India as foreign direct investment in the Indian companies.

Now such transactions from one company to the other will now attract a VAT of 5 percent. Further, the entities will also have to maintain a regular book of accounts for any transactions.

"Besides higher cost of operations on account of VAT, entities in Dubai will be forced to maintain regular books of accounts. This will enable UAE authorities to monitor their activities and track the transaction trail," said Dilip Lakhani, senior chartered accountant.

"Till the time other creative and ingenious ways are discovered, VAT can go a long way in curbing money laundering," he added. 

How does money laundering happen?

The money laundering typically includes a chain of companies. For instance, firm A which receives funds through undisclosed and untaxed income initially transfers the money to firm B on the grounds of false invoices. Then, firm B, in turn, enters into a similar deal with firm C.

Once the money is transferred to firm C, companies A and B shut down to remove the trail and no records would remain to find out if the companies actually existed.

However, now with the implementation of the new tax system on transactions, this easy transferring of money will not be possible due to VAT registration and tax payment records of A and B that will always remain as a proof even if the companies cease to exist.

Dubai's The Tower
An artist's impression of Dubai's "The Tower" that would be the world's tallest tower. [Representational Image]Emaar Properties/Handout via REUTERS

Further, according to recent reports even European Union's (EU) finance ministers adopted a blacklist of 17 jurisdictions deemed to be tax havens, including UAE and Bahrain in an attempt to fight worldwide money laundering.

The countries on the blacklist are barred by EU institutions for any international financial transactions and also any transactions involving them could be subject to closer scrutiny.

"There will be some amount of disruption in UAE starting Jan 2018. Considering that UAE has been blacklisted by EU, all steps are being taken to comply very seriously with various guidelines," said Mitil Chokshi, senior partner at chartered accountant firm Chokshi & Chokshi.