VAT in UAE

Value Added Tax (VAT) is an indirect tax. It is a type of general consumption tax that is collected incrementally, based on the value added, at each stage of production or distribution/sales. It is usually implemented as a destination-based tax. It is also known as goods and services tax (GST) in some countries

VAT is one of the most common types of consumption tax found around the world. Over 150 countries have implemented it. It includes all the 28 countries who are members of the European Union (EU) apart from Canada, New Zealand, Australia, Singapore, Malaysia, Britain and India. USA does not have VAT.

Government has tentatively decided to introduce VAT in UAE by 01 January, 2018. The proposed rate of VAT in UAE will be up to 5%.
VAT, a general consumption tax, will apply to the majority of transactions in goods and services. Some specific food items, healthcare & education sectors are at present exempted from VAT. The criteria for VAT registration will be on the annual turnover of the business entity.

VAT implementation will strengthen UAE’s economy. It is expected to contribute around 2% of the GDP of the country in the first year of implementation.

It is a bold move on the part of the authorities of the country and will boost on paradigm shift in the revenue stream of the country from oil sourced revenue to non oil sourced revenue.

Further it is additional revenue for the government to meet its future enhanced social service requirements.

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1. What is tax?

 

Tax is a compulsory contribution by individuals and corporate to the national Exchequer by means of which government authority finances their expenditure for public services.

There are mainly two types of taxes:

A direct tax – collected by government from the person on whom it is imposed (e.g., income tax, corporate tax).

Indirect tax – collected by an intermediary (e.g. a retail or wholesale store etc.) from the person that ultimately pays the tax (e.g., VAT, Sales Tax, GST, etc.) and paid to government.

An indirect tax – a tax paid to the government by one entity in the supply chain, but it is passed on to the consumer as part of the price of a good or service. The consumer is ultimately paying the tax (e.g., VAT, Sales Tax, GST, etc.) by paying more for the product.

2. What is VAT?

Value Added Tax (VAT) is an indirect tax. It is a type of general consumption tax that is collected incrementally, based on the value added, at each stage of production or distribution/sales. It is usually implemented as a destination-based tax. It is also known as goods and services tax (GST) in some countries

VAT is one of the most common types of consumption tax found around the world. Over 150 countries have implemented VAT all over the world. It includes all the 28 countries who are members of the European Union (EU) apart from Britain, Canada, New Zealand, Australia, Singapore and Malaysia. USA does not have VAT.

VAT is charged at each step of the ‘supply chain’. Ultimate consumers generally bear the VAT cost. The Businesses act as tax collector for the government authorities. They collect, account and pay the tax to the government.

A business pays the government the net of the tax. I.e. the net amount after deducting the tax paid to the suppliers from the tax collected from the customers. This net result is that tax revenue to government authority that reflects the ‘value added’ throughout the supply chain.

 

3. What is the difference between VAT and Sales Tax?

For the public there may not be any noticeable difference between the VAT & Sales Tax. But there exist some key differences. In many countries, sales taxes are only imposed on transactions involving goods. Further sales tax is imposed only on the final sale to the consumer. This contrast with VAT is that it is imposed on goods and services in an incremental manner and is charged throughout the supply chain, including on the final sale. In other words, VAT is levied on both producer and consumer where as Sales Tax is levied only on the end consumer. VAT is also imposed on imports of goods and services and hence it ensures that business interest on price levels of the domestic providers of those same goods and services are considered. VAT needs strict accounting practices and system in the business where as Sales Tax doesn’t need require such strictness. The chance of tax evasion is much less in case of VAT as compared to Sales Tax where tax evasion is rampant and difficult to detect.

 

4. Which tax system is preferred by Governments in different countries? VAT or Sales Tax? And why?

Many countries prefer VAT over sales taxes for a variety of reasons. One of the main reasons is that VAT is considered as a more sophisticated approach to taxation in addition businessmen acts as tax collectors on behalf of the government and thereby generates good revenue for the government. Further VAT significantly reduces tax evasion.

 

5. What will be the rates of VAT in UAE?

The proposed rate of VAT in the UAE will be up to 5%.

6. What will be the mechanism of Government to collect the VAT from each customer?

The significance is that each VAT registered business entity becomes automatically the agent of the government to collect from customers and pay it back to the Government Authority. VAT is charged at each stage of the ‘supply chain’. Ultimate consumers generally bear the VAT cost. The Businesses act as tax collector for the government authorities. The difference between the VAT charged on customers and the VAT paid to suppliers will be either paid to or reclaimed from the government

 

7. Why VAT is going to be implemented in UAE?

One of the main objectives of the UAE Federal Government as well as the respective Emirate Governments for introducing VAT is to generate more revenue for providing enhanced support to the citizens and residents by offering various types of public services – including medical facilities like hospitals, good roads and transportation like metro services, public schools, parks, waste control etc. These expenses of these services are borne by the government from its public funds which are ear marked in the budgets. VAT will provide a new source of non oil revenue for the emirates which will increase the revenue towards the Government exchequer. The will help the Government for providing better and high quality public services in the future thereby enhancing the living standard of the public. VAT will also result in increase in the government non oil revenue which is estimated to be around 2% of the GDP.

 

8. When VAT will be implemented in UAE?

The Federal Government has tentatively decided to introduce VAT in the UAE by 01 January, 2018

9. Will VAT cover all products and services in UAE?

VAT, as a general consumption tax, will apply to the majority of transactions in goods and services. Some specific food items (94), healthcare & education sectors are at present exempted from VAT.

 

10. Whether cost of living will increase in UAE?

The hike in price depends upon the sector of the product and services which is taken into account for consideration. The burden of VAT or any other form of taxation needs to be borne by someone – either the business or consumers or both. The market will decide whether the consumer will bear the cost or the trader/manufacturer. Naturally in the case of sellers’ market, the traders will impose the tax burden on the end consumers and to that extend the cost of living of the individuals is likely to increase. But, in the case of buyers’ market, the cost of VAT will have to be borne by the trader/manufacturer and cannot be passed to the consumers.

In short, there is a likelihood that the cost of living may go up in the UAE. But this will vary depending upon the individual’s spending pattern and lifestyle. If one is to spend mainly on items which are not attracted by VAT, then the cost of living of the individual is unlikely to have any significant increase.

 

11. When can business entities start registering for VAT?

As per information available from the official site of the Ministry of Finance, UAE, registration for VAT will be opened to the business entities 3 months before the launching date. Hence if the VAT in the UAE is going to be implemented from 1st January 2018, VAT registration is likely to commence from the 1st October 2017. Business entities will have the option to use online registration service.

 

12. When the VAT returns are to be filed?

As per the official site of Ministry of Finance, UAE, majority of the business entities will be required to file the VAT returns at least on a quarterly basis. The exact requirements will be known only when the VAT laws are published.

 

13. Whether UAE tourists also have to pay VAT here?

Every customer, irrespective of the fact whether he is a resident or a tourist, has to pay VAT if he is consuming the VAT applicable goods or services.

 

14. Who all will come under VAT registration?

Requirement of VAT registration is based on the annual turnover of each company. It is mandatory for a business enterprise to register for VAT if its annual turnover is above one million US$. However the registration for VAT is optional in case of business units having annual turnover between US$ 0.5 Million and US$ one million. The Government has made this decision to safeguard small businesses from the cumbersome procedure of extensive documentation and reporting system that is going to be implemented under VAT. Also, the government is likely to exempt some organizations that only provide goods and services which are not subject to VAT.

 

15. What are the responsibilities of business entities once VAT is implemented?

 

All business entities in UAE:

a) Registered for VAT or not should maintain proper records of their business transactions and ensure that all financial records are accurate and up to date.

b) Should register under VAT if they are coming under eligibility criteria based on turn over.

c) All VAT registered business entities should charge VAT on taxable goods or services they supply.

d) All VAT registered business entities may reclaim any VAT they have paid on goods or services.

e) Should maintain correct and accurate business records for government scrutiny to ensure that that business entities adhere to the mandatory requirement stipulated by the Government.

f) All VAT registered business entities must report the amount of VAT they collected and the amount they paid to the government on a regular basis. The Tax authority may open an online portal for submitting this record on periodic basis (normally called VAT return)

If any excess VAT is charged on any customer than the fixed amount, then such excess amount collected has to be paid to the VAT authority. Similarly, if the amount of VAT paid is more than the amount collected, refund can be claimed for the difference.

16. Whether business entities have to prepare anything in advance for VAT? If so what are those?

Every business unit in the UAE should get prepared well in advance before the due date of VAT implementation on the following points:

a) Check whether they come under mandatory VAT registration category or not. If they do come, then they will have to meet the mandatory requirements to fulfill their tax obligations.

b) For complying with the VAT requirements, every organization has to make some changes to their existing financial management and accounting system, accounting software, and sometimes even to their core operation style.

c) Human resource training will be necessary to update and upgrade the staff to equip themselves to the new regulatory requirements.

17. Is there any chance for the tourists to reclaim VAT?

Tourists also have to pay VAT for the goods or services (if it attracts VAT), they consume. However in general, such tourists can claim back the VAT they paid, while they leave the country.

 

18. Whether Income Tax will also come in to affect in UAE?

As per the information available from media, the UAE government is not considering of introducing personal income tax in the country.

 

19. What will be impact on UAE economy once VAT is implemented?

a)  VAT implementation will strengthen UAE’s economy. It is expected to contribute around 2% of the GDP of the country in the first year of implementation.

b) It is a bold move on the part of the authorities of the country and will bring about a paradigm shift in the revenue stream of the country i.e.from oil sourced revenue to non oil sourced revenue.

c) It will be additional revenue for the government to meet its future social service requirements.

d) Inflation in the country may go marginally up.

20. What is the VAT liability of a registered business entity?

The total VAT amount collected by the business entity from its customers (output VAT) are to be reconciled with the total VAT amount paid by it to the suppliers on a periodical basis. The excess amount collected over the paid amount is the VAT liability for the business entity and are to be paid to the government within stipulated time period.

 

21. What are the VAT exempted items in UAE?

Certain food items (94 items), educational sectors and healthcare sector are at present exempted from VAT in the UAE.

 

22. Whether UAE VAT is applicable in service sector?

Yes, it will be applicable in service sectors as well (except healthcare & Education sectors).

 

23. VAT is applicable in Export?

VAT is not applicable to export items.

24. VAT is applicable for construction industry?

VAT is applicable to Construction industry in the same way as they are applicable to the other industries.

 

25. What is the effect of VAT in existing long Contracts?

The contracts already signed before the date of implementation of VAT and which are likely to be extend to the period in which VAT is applicable are to be revised to take in to account of VAT impact.

 

26. How to take refund from VAT?

The registered entities who are eligible to get VAT refund (When input VAT is more than output VAT) can submit the VAT returns to the authority by disclosing the same.