VAT in the UAE
Tax collection is the primary source by which governments raise revenue to pay for publicservices. These revenues are reinvested into the economy and used to pay for amenities suchas public hospitals, schools and universities, as well as defence, infrastructure and otherimportant aspects of daily life.
There are two types of tax – direct and indirect tax. Direct taxes are imposed on the incomeearned by the citizens of a country and thus payable only buy citizens earning above a certainthreshold as decided by the government whereas indirect taxes are usually included in the priceof consumer goods/services and thus payable by every person buying such goods or services.
What is Vat?
Value Added Tax (or VAT) is an indirect tax. VAT is imposed on most supplies of goods and services that are bought and sold. It is one of the most common types of consumption tax found around the world. VAT is charged at each step of the “supply chain”. Ultimate 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 the government reflect the “value add” throughout the supply chain.
VAT was introduced across the UAE on 1st January 2018 at a standard rate of 5%.
Registering for VAT
VAT registration in the UAE is threefold in nature:
- Mandatory Registration - A business must register for VAT if their taxable supplies and imports exceed the mandatory registration threshold of AED 375,000.
- Voluntary Registration – A business may choose to register for VAT voluntarily if their total value of supplies or expenses subject to tax over previous 12 months exceeds voluntary registration threshold of AED 187,500.
- Tax Group Registration - Group of companies can register one company as a representative for VAT purposes. This lends to administrative convenience. Intra group supplies are exempted. Supplies are deemed to be made by representative member.
- Each member of group shall have place of establishment or fixed establishment in the UAE.
- The members should be related parties. (persons associated in economic, financial and regulatory aspect given under Executive Regulation).
- One or more persons conducting business in a partnership shall control the others.
Responsibilities of VAT Registered Business
- Must charge VAT on taxable goods or services they supply.
- VMay 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
- Report the amount of VAT charged and the amount of VAT paid to the government on a regular basis.
- If VAT charged is more than VAT paid, difference must be paid to the government. If VAT paid is more than VAT charged, the difference can be reclaimed.
VAT is imposed at differing rates on different sectors of the economy:
- Zero rated Supply – VAT is charged at 0% on:
- 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 three 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
- ZVAT exempt Supply – The following supplies are exempt from VAT:
- The supply of some financial services (clarified in VAT legislation)
- Residential properties
- Bare land
- Local passenger transport
- Standard Rated Supply – VAT is charged on the following at 5%:
- Forms part of taxable supply
- On import of concerned goods and services
Penalties under VAT law
The FTA also imposes penalties under VAT law where businesses have failed to comply. These penalties are:
- Failure to display prices inclusive of tax – AED 15,000
- Failure to notify Authority of applying tax based on the margin – AED 2,500
- Failure to comply with conditions and procedures related to the transfer of goods in designated zones - AED 50,000 or 50% of the tax, if any, unpaid on the goods as the result of the violation.
- Failure to issue a tax invoice or alternative document when making any supply – AED 5,000 for each missing tax invoice or alternative document
- Failure to issue a tax credit note or alternative document – AED 5,000 for each missing tax credit note or alternative document.
- Failure to comply with the conditions and procedures regarding the issuance of electronic tax invoices and electronic tax credit notes – AED 5,000 for each incorrect document.
Therefore, imposition of VAT is a tool is the hands of the UAE government to impose and collect tax in a swifter and steadier manner than normal tax regimes. It leads to diversification of the economy and reduce reliance on oil and gas sectors for growth. It also minimizes risk of tax evasion by imposing detailed maintenance of records and frequent reports to the Federal Tax Authority.