Value Added Tax (VAT) in UAE

Value Added Tax (VAT) in UAE

All you want to know..!

What is VAT?

Value Added Tax (or VAT) is an indirect tax applied on the consumption of most goods and services. It is also referred to as a type of general consumption tax. It is imposed on a product at each stage of production before the final sale.

At each stage in the supply chain, businesses collect VAT on behalf of the government. Because it is added to the customer’s purchase price, ultimately it is the end consumer who pays VAT.

Why is UAE Implementing VAT?

One of the main reasons for implementing VAT in UAE is to generate more revenue for the government. Using this revenue, the Government plans to offer various types of public services, including medical facilities, good roads, transportation facilities, public schools, parks, waste control, and more. VAT will also provide a new source of non-oil revenue for the Emirates.

When will VAT go into effect?

The Federal Tax Authority has decided to introduce VAT in the UAE by 01 January 2018

What are the VAT rates?

The proposed standard rate of VAT in the UAE will be up to 5%. Certain supplies of goods and services may be either exempt (meaning VAT will not be applicable at all), or zero-rated (meaning 0% VAT will be applied to goods and services). The standard rate will be applied to all goods and services that do not fall under an exempt or zero-rated goods and services category.

How will VAT affect one’s cost of living?

Each person’s cost of living is affected by their lifestyle, so the impact of VAT will vary between individuals. There will probably be a slight increase in overall cost of living, but a person who spends mostly on exempt and zero-rated things will not see much increase.

Will VAT be applicable for tourists?

The short answer is yes. The travel and tourism industry is an important part of the UAE’s national economy.

Not all parts of the industry will be subject to the same VAT rates, though. The travel and tourism sector can be broken down into several components, such as luxury, medical, education, meetings, exhibitions, healthcare, education, events and other special interest groups. It is expected that healthcare and education will be zero-rated supplies in the UAE. Meetings, conferences, events, and trade expos, which account for a significant portion the revenue-generating drive of the tourism sector, will be taxable.

Currently, the UAE is doing a feasibility study of a Tourist Refund Scheme where visitors and tourists will be able to claim a refund on VAT paid on certain goods and services purchased in the UAE.

Will VAT be paid on imports?

If goods and services are purchased from abroad, VAT is applicable. Most of the goods and services consumed in the UAE are imported; most come from Europe and Asia, while a few come from other GCC countries. To make it easier to understand, let’s see a few examples:

Case 1:

If the business owner in the State is a registered person with the Federal Tax Authority for VAT purposes, VAT would be due on that import using a reverse charge mechanism.

Example:

Afridi is a perfume dealer in UAE and is a VAT registered business owner. He imports perfume from France for sale in the UAE. He will owe VAT under the reverse charge mechanism, in which Afridi pays the tax directly to the government, and he can claim Input Tax Credit for this import.

Case 2: 

If the business owner in the State is a non-registered person for VAT, then VAT would be paid on goods being imported from outside the GCC. Such VAT will typically be paid before the goods are released to the person.

Example:

Abdul is a non-registered business owner under VAT in the UAE. He imports goods from places outside the GCC. In this scenario, VAT is due to the UAE government and has to be paid before the goods are released to Abdul.

Case 3:

If goods are transhipped via UAE to other GCC countries, import VAT is applicable. The Input Tax Credit cannot be claimed in UAE, but can be claimed in the final destination member state.

Example: 

Hamid deals in cutlery, and he tranships goods via the UAE to other GCC countries. In this case, import VAT is applicable. Although Hamid has to pay VAT in the UAE, the input tax credit cannot be claimed there. He can only claim it in the destination state.

Case 4: 

If Goods are previously imported to UAE and then exported to other GCC countries, import VAT is applicable. The input credit recovered via reverse charge has to be paid back to the UAE tax authority.

Example:

Kadar owns an electronics business in the UAE and Kuwait. He previously imported 100 television sets to the UAE, and then he exported 40 of them to Kuwait (which is also a GCC country). In this case, the input tax credit which Kadar received on the 40 television sets has to be paid back to the UAE tax authority.

Will VAT be paid on exports?

Export of goods and services outside the GCC and international transportation are zero rated. They must be reported in tax returns, but no VAT will apply.

When and how should VAT returns be filed?

UAE taxpayers should file VAT returns with the Federal Tax Authority (FTA) on a quarterly basis. Returns must be filed according to the procedures specified in the VAT legislation, within 28 days from the end of the tax period. Taxpayers can file their returns online using e-services.

For instance, if Ali has VAT returns for the October to December 2017 quarter, he has to file them before 28th of January, 2018.

How can VAT be claimed?

Registered businesses whose input VAT (tax applied on the purchase of goods or services) is more than their output VAT (tax applied on the sale of goods or services) should indicate on their tax returns that they are eligible to receive VAT refunds.

VAT can be claimed under these scenarios:

Input tax paid on expenses related to taxable supply	Fully recoverable by the registered VAT person
Input tax paid on expenses related to non-taxable/exempt supply	May not be recoverable by the registered VAT person
Input tax paid on expenses related to both taxable and non-taxable/exempt supply	Recoverable on a proportionate basis by the registered VAT person. The registered person needs to apportion their input tax between the taxable and non-taxable/exempt supplies. Businesses will be expected to use input tax (ratio of recoverable to total) as a basis for apportionment. Other methods may be used if they are fair and agreed upon by the Federal Tax Authority (FTA).

What is VAT grouping?

Businesses that satisfy certain requirements provided by the legislation (such as being under the same ownership and located within the same GCC country) will be able to register as a VAT group.

For some businesses, VAT grouping will be a useful tool to simplify accounting for VAT. By registering under the Group VAT scheme, businesses will get a single VAT number and can file a single return. A VAT group allows people and entities that are closely linked financially, economically and organizationally to operate as a single VAT person.

How is real estate treated under VAT?

The VAT treatment of real estate will depend on whether it is a commercial or residential property.

Supplies (including sales or leases) of commercial properties will be taxable at the Standard VAT rate (i.e., 5%). On the other hand, supplies of residential properties will be exempt from VAT.

To ensure that real estate developers can recover VAT on the construction of residential properties, the first supply of residential properties within three years after their completion will be zero-rated.

The sale of bare or undeveloped land will be tax-exempt.

Can businesses claim VAT incurred on expenses?

Businesses can claim VAT under the following circumstances:

·   If the business is registered under VAT, they can claim a refund on expenses (the end consumer cannot claim any input tax refund).

·     The VAT should be charged correctly (i.e., unduly charged VAT is not recoverable).

·     Businesses should have proper documents (such as a valid VAT invoice) showing that the VAT is paid.

·   VAT input tax refund can be claimed only on the amount paid (or intended to be paid) within 6 months after the supply date.

Is there any condition under which VAT incurred on expenses cannot be claimed?

VAT will not be deductible for non-taxable supplies. Customs duty paid at the time of import cannot be claimed for payment of VAT. Furthermore, input tax cannot be deducted if it is incurred for certain expenses, such as entertainment expenses.

For instance, if Mr. Noor Afridi, manager of Afridi Steel in Dubai, takes his team out for dinner, he cannot claim input tax credit for this expense.

What sectors are zero rated?

Zero-rated supplies include:

·         Exports of goods and services to outside the GCC.

·         International and intra-GCC transport

·         Supplies for certain sea, air, and land means of transportation (such as aircraft and ships).

·         Supply of precious metals for investment (gold, silver, and platinum)

·         Newly constructed residential properties that are supplied for the first time within three years of their construction.

·         Supply of certain educational services and relevant goods and services.

·         Supply of certain healthcare services and associated goods and services.

·         Certain eatables (a standard list will be ratified across the GCC by the Financial and Economic Cooperation Committee) 

·         The oil sector and the oil and gas derivatives sector (at the discretion of each member state)

Additionally, each member state can zero rate or VAT-exempt:

·         The educational sector

·         The medical sector

·         The real estate sector 

·         The local transport sector

Will customs duty be applied once VAT come into effect?

Yes, customs duties will be applicable under VAT. VAT shall be levied on the value of goods including the value of customs duty.

Are VAT-exempted goods and services also exempt
from customs duty?

Not necessarily. VAT and customs duty are two separate and independent levies. Even if customs duty is exempted on certain goods, imports can be subjected to VAT.

Who needs to register for VAT?

A business should register for VAT if their taxable supplies and imports exceed the mandatory registration threshold of 375,000 AED.

A business can also choose to register for VAT voluntarily under two conditions:

·        If the supplies and imports of the business are less than the mandatory registration threshold, but greater than the voluntary registration threshold of AED 187,500.

·       If expenses of the business exceed the voluntary registration threshold. This opportunity is designed to enable start-up businesses with no turnover to register for VAT.

How will business owners calculate their VAT?

Businesses should keep track of their sales purchase and expenses including the tax paid on the same. The tax payable by for a particular taxpayer is equal to tax collected on output (sales) - tax paid on input (purchases).

Let’s look at an example of how to calculate output and input VAT.

Suppose you own a coffee shop and spend AED 100,000 towards obtaining raw materials. The input tax rate is 5%, so the input tax you pay is 5% of AED 100,000 = AED 5,000.

Now after selling coffee using the purchased raw materials, you make sales of AED 200,000. Supposing 5% is the output tax, the output tax you pay is AED 10,000.

So, final (net) VAT payable by you will be  AED 10,000 -5,000 = 5,000.

In the VAT settlement, you deduct input VAT from output VAT. The resulting amount must be reported to your regional tax office. As you can see, you only pay tax to the state on the value your enterprise has added to the goods. (If your purchases exceed your sales in any one period, the difference will be negative, and the 

difference will be refunded).

How does VAT work?

Output VAT is the value added tax that you calculate and charge on your own sales of goods and services if you are registered for VAT. Output VAT must be charged on sales both to other businesses and to ordinary consumers.   Input VAT is the value added tax added to the price you pay for eligible goods or services. If you are registered for VAT, you can deduct the amount of VAT paid from your settlement with the tax authorities.

VAT registered businesses charge and add VAT to the value of goods and services they supply. They can also reclaim VAT incurred on goods and services. Please refer to the illustration for an easy-to-understand example.

	Sales AED	Calculation AED	VAT AED	Total AED
Coffee Beans Manufacturer	10.50	0.50	0	0.50
Beans Distributor	15.00	0.75	0.5	0.25
Coffee Shop	20.00	1.00	0.75	0.25
Total VAT paid by end consumer*				1.00

*VAT is collected through the supply chain, and the end consumer pays and bears the VAT cost.

·      The manufacturer sells the raw beans and charges 5% (0.50) on the sale price as output tax (VAT) to the distributor. As the manufacturer has not incurred any input tax on his purchases, he has a net VAT payable to the tax authority of 0.50 (0.50 output VAT – 0 input VAT = 0.50 payable).

·      The distributor has incurred input tax of 0.50 on his purchase from the manufacturer, and charges 5% (0.75) on his selling price as output tax to the coffee shop. The distributor therefore has a net VAT payable of 0.25 (0.75 output tax – 0.50 input tax = 0.25 payable to the tax authorities).

·     The coffee shop has incurred input tax of 0.75 on its purchase from the distributor, and charges 5% (1.00) on its selling price as output tax to the final consumer. The coffee shop therefore has net VAT payable of 0.25 (1.00 output VAT – 0.75 input VAT = 0.25 payable to the tax authorities).

·        The final consumer bears the full burden of the tax paid to the tax authorities, AED 1.00.

For imports, VAT is charged at the first point of entry into the consumer’s country or state (where customs duty may also apply).

Can UAE Nationals claim VAT?

UAE nationals who are not registered for VAT can still claim VAT under certain circumstances. For instance, the government will be introducing a scheme allowing UAE nationals to reclaim VAT related to building new residences for themselves and their families. They can claim VAT for contractors’ services, building materials, and similar expenses.

What sectors are VAT exempt?

The following categories of supplies that will be exempt from VAT are:

·         The supply of certain financial services

·         Sale of bare land

·         Lease or sale of residential property 

·         Local transport

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Posted in: Taxation