Overview of the VAT in the UAE
Value Added Tax (VAT) is set to make its debut in 1 st of January 2018. But what is VAT?
Value Added Tax (VAT), known in some countries as a goods and services tax (GST), is an indirect tax. It is a type of general consumption tax that is collected incrementally, based on the surplus value, added to the price on the work at each stage of production, which is usually implemented as a destination-based tax, where the tax rate is based on the location of the customer.
VAT will be introduced across the UAE on 1 January 2018 at a standard rate of 5%. It will be imposed on supplies of goods and services that are bought and sold.
VAT is charged at each step of the ‘supply chain’. Consumers generally bear the VAT cost while Businesses collect and account for the tax, in a way acting as a tax collector on behalf of the government.
A business pays the government the tax that it collects from the customers while it may also receive a refund from the government on tax that it has paid to its suppliers. The net result is that tax receipts to government reflect the ‘value add’ throughout the supply chain.
VAT for Businesses
A business must register for VAT if their taxable supplies and imports exceed the mandatory registration threshold of AED 375,000.
Furthermore, a business may choose to register for VAT voluntarily if their supplies and imports are less than the mandatory registration threshold, but exceed the voluntary registration threshold of AED 187,500.
Similarly, a business may register voluntarily if their expenses exceed the voluntary registration threshold. This latter opportunity to register voluntarily is designed to enable start-up businesses with no turnover to register for VAT.
All businesses in the UAE will need to record their financial transactions and ensure that their financial records are accurate and up to date. Businesses that meet the minimum annual turnover requirement (as evidenced by their financial records) will be required to register for VAT. Businesses that do not think that they should be VAT registered should maintain their financial records in any event, in case we need to establish whether they should be registered.
VAT-registered businesses generally:
- Must charge VAT on taxable goods or services they supply;
- May reclaim any VAT they’ve paid on business-related goods or services
- Keep a range of business records which will allow the government to check that they have got things right.
Standard Rate is a supply on which VAT is charged at 5% and for which the related input VAT is deductible. All items which are not coming under both exempted category, as well as zero-rated category, are coming under standard rated supplies.
VAT will be charged at 0% in respect of the following main categories of supplies:
- Exports of goods and services to outside the GCC;
- International transportation, and related supplies;
- Supplies of certain sea, air and land means of transportation (such as aircrafts and ships);
- Certain investment grade precious metals (e.g. gold, silver, of 99% purity);
- Newly constructed residential properties, that are supplied for the first time within 3 years of their construction ;
- Supply of certain education services, and supply of relevant goods and services;
- Supply of certain Healthcare services, and supply of relevant goods and services.
The following categories of supplies will be exempt from VAT:
- The supply of some financial services (clarified in VAT legislation);
- Residential properties;
- Bare land; and
- Local passenger transport