UAE introduced Value Tax (VAT) on January 1, 2018. The VAT rate of 5 percent gives UAE a new source of revenue which can continue to be used to deliver quality public services. It will also assist the government in reducing its dependence on hydrocarbons, including oil, to generate revenue.
The UAE government is committed to building a strong growing economy and transforming the country into one that is conducive to investment and employment opportunities. The introduction of VAT will allow the government to diversify their sources of income and continue to ensure the UAE residents a good standard of living.
VAT implementation is expected to generate AED 12bn of revenue in its first year and up to AED 20bn in the second year.
For businesses worldwide that are involved in VAT compliance, the process of ensuring compliance is continuous and complex. Companies need to constantly be updated with tax laws and regulations, amendments, public clarifications by the FTA etc. An approved tax agent can help make the process easier and assist the company in VAT compliance.
There are two main tax categories:
- The taxpayer directly pays direct taxes to the government.-CT
- An intermediary collects indirect taxes from taxpayers and delivers them to the government.-VAT
The indirect tax of VAT is levied on goods or services. It is assessed at every step of the supply chain. End consumers pay the VAT costs. Registered businesses collect VAT and act as tax collectors for the government.
What industries are taxed?
VAT is charged at 5% on the supply of all products and services, which includes commercial buildings, food or hotel facilities etc. However, there are certain categories of income that are zero rated and exempt.
Zero rated Supplies;
- Healthcare services include primary and preventive healthcare services and related supplies.
- All the educational services are zero-rated. It includes the goods and services meant for pre-schools, nurseries, primary school education, and all the higher education that have been owned or are being funded by the federal or local government.
- Supply of Crude oil
- Supply of Natural gas
- Precious metal investments
- Residential buildings that have been built within three years may be through leasing or sale of it in part or incomplete.
- Building made for charity purposes, whether through rental or sale.
- Commercial buildings that are converted to residential properties either through rental or sale.
- The goods and services that help transport goods or people by land, air or sea.
- Vessels and aircraft that are supposed to help in rescue operations by land or by sea.
- The exports of products and services to the countries that are not member states of the GCC countries.
Exempt Supplies;
- The transportations happening within the UAE or the local transportations in the UAE.
- Supply of bare lands.
- The residential buildings apart from first supply that is zero rated.
- Financial services like the insurance plans, life insurance reinsurance, and everything that is not being done for a discount, explicit fee, commission, rebate, or any other kind of compensation.
There are certain supplies that are outside the scope of VAT like compensatory payments (fines/penalties), intra tax group transactions, supply of goods between designated zones/ from designated zone to outside UAE etc.
Liability of VAT
The tax liability of VAT can be defined as the difference between an output tax to be paid (VAT applied to supplies of services and goods) for a particular tax period and the input tax (VAT paid on purchases) that is recoverable for that same period of tax.
When the output tax is higher than the input tax, the difference should be paid FTA. Conversely, if the input tax exceeds the output tax, a tax-paying taxpayer will be entitled to have the excess tax returned to him and offset this against any subsequent payments payable to FTA.
Criteria for registering for VAT
A business/company is required to register for VAT if its tax-deductible imports or supplies exceed AED 375,000 annually.
It is voluntary for companies whose supply or imports exceed AED 187,500 yearly to register for VAT.
A company is liable to the government for the tax it collects from its customers. In addition, it gets a refund from the government for the tax that it has remitted to its suppliers.
Tourists may also claim back the VAT they incur while visiting the UAE.
How to register for VAT?
Depending on the company’s revenues, registration may be required or optional.
1. Mandatory registration
A business/company must register for VAT if the UAE’s taxable sales or imports value exceeds AED 375,000.
2. Voluntary registration
If the business’s total taxable sales or imports within UAE exceeds AED 187,500 it can register for VAT.
If expenses exceed the threshold for voluntary registration, startups and small businesses can opt to register voluntarily. This will allow them to be eligible for the tax credit.
Businesses can sign up for VAT using the eServices section of the FTA website. However, they have to register first for an account. Online registration for businesses is possible by logging into the FTA website.
How is VAT collected?
VAT-registered businesses pay the money to the government. Consumers pay tax in the form of a 5 % increase in the price of products and services purchased in the UAE.
Tax-registered businesses in the UAE can avail input tax credit on VAT payments made which are in relation to their business.However certain VAT payments cannot be claimed such as expenses related to staff entertainment expenses, expenses without a proper tax invoice etc.
Tourists who visit and spend in the UAE are eligible for tax refund.
We can help you with your VAT registration, filing, and compliance. Contact us – AMAJ UAE
