VAT in UAE - All You Need to Know

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The VAT in UAE i.e., the Value Added Tax was introduced from 1st January of the year 2018. If you are someone who is new to UAE and are unaware of this kind of tax, then hang on to this guide that will help you find out everything that you need to know.

What is VAT?

VAT or Value Added Tax is a tax levied on the transactions of goods and services. This tax is applied at each stage of the existing supply chain and is based on the value that is added at each stage. The cost is ultimately born by the end consumer and is not due to businesses. The businesses collect this tax and account for it on the behalf of the government or the Federal Tax Authority.

The rate at which the Value Added Tax is charged is 5%.

VAT Services

There are 3 categories under VAT:

  1. 5% Value Added Tax
  2. Zero-rated Supplies
  3. Exempt Supplies

Eligibility Criteria for a Business to Register for VAT

A business must register for Value Added Tax if its taxable imports and supplies exceed the amount AED 375,000 per year. It is optional for those businesses that have imports and supplies exceeding the amount AED 187,500 but are below the amount of AED 375,000 per year.

A business pays the government authority the tax that is collected by its customers. At the same time, the business receives a refund on the tax paid to the suppliers from the government authorities.

The foreign businesses may also recover the incurred VAT during the visit to the UAE.

Note: VAT applies equally to the tax-registered businesses managed both in the UAE and in the free zones. But, if the cabinet of UAE defines a particular free zone as a designated zone, then it must be considered as outside UAE for the purposes of tax. The transfer of services and goods between these designated zones is free of tax.

How to Register for VAT?

The businesses can use the eServices option on the website of FTA to register for VAT. However, they will be required to create an account first.

How is VAT Collected?

The businesses that have registered for VAT collect the applicable amount on the government’s behalf. The consumers have to bear the VAT as a 5% increase in the cost of the taxable goods and services purchased by them in the UAE.

UAE imposes a Value Added Tax on the businesses that have registered for VAT at a 5% rate on a taxable supply of the goods and services at each stage of the supply chain. Tourists visiting the UAE are also required to pay VAT at the point of purchase.

What is a VAT Return?

A VAT return is a summary of the value of the purchases and supplies made by a taxable individual during the tax period and depicts the VAT liability of the taxable person.

At the end of every tax period, the VAT registered businesses or the taxable individuals are required to file a VAT return to the Federal Tax Authority.

How to file a VAT Return?

The VAT returns by the tax-registered business or the taxable individuals must be filed with the FTA on a regular basis and generally within a period of 28 days of the end of the tax period which is defined for the various kinds of businesses. A tax period is a fixed period for which the tax that is payable shall be calculated and then paid. The standard tax period is as follows:

  • The quarterly basis for the businesses that have an annual turnover that falls below the amount of AED 150 million
  • The monthly basis for the businesses that have an annual turnover that is equal to or more than AED 150 million.

Although the VAT returns must be submitted via electronic platforms, the accounting records and documents related to the business activities should be kept, including the profit and loss account, balance sheet, records of payroll, fixed assets, wages, inventory statements, and records.

Difference between VAT and Sales Tax

A Sales Tax is a type of a consumption tax, just like Value Added Tax. For the general consumer, there might not be any visible difference as to how these two types of consumption taxes work, but there are certain differences.

In many parts of the world, sales taxes are imposed only on transactions that involve good. On top of this, sales tax is only charged on the final sale made to the customer. On the contrary, VAT is imposed on goods and services and is imposed throughout the entire supply chain including the final sale made to the customer. VAT is also applicable to the import of the services and goods to make sure that there is a level maintained for the domestic providers.

Many countries tend to prefer VAT over sales tax for various reasons. VAT is considered to be an approach that is more sophisticated as it makes the businesses the collectors of tax on behalf of the government which thereby cuts down on tax evasion and misreporting.

VAT on Gold in UAE

When a business is supplying gold to a person who is registered under Value Added Services and is purchasing the goods for resale purposes or to manufacture or produce gold-based products, the supplier does not need to charge VAT on such supply. Instead, the VAT on Gold that is due on the supply is to be accounted for by the recipient and is to be reported this VAT in their return. If the recipient meets with the conditions for the recovery of input tax, VAT return can be filed on this VAT.

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