VAT in UAE an Overview

The Acronym of VAT is “Value Added Tax”. VAT is one of the most common types of consumption tax found around the world. The ‘Gulf Co-operation Council (GCC) countries have agreed ‘in principle’ to the VAT Agreement to levy VAT in the region. This has been done with the view that this will help the Gulf region to reduce their dependence on oil and other hydrocarbon derivatives as a source of revenue. Hence, it is agreed by all the GCC countries that the VAT would be introduced in every country latest by 1st of January 2019. Saudi Arabia and United Arab Emirates have already implemented VAT effective 1st January 2018. Now, like most of the countries across the world, businesses in the Gulf region will now have to mandatorily adhere to stringent VAT regulatory and statutory compliances and report the same on a regular basis. It would be a challenge for the business community in the Gulf to understand the new VAT Law and implement the same well before the stipulated due date.

The General Principles of VAT :

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/distribution/sales. It is normally implemented as a destination-based tax. In some countries it is known as “goods and services tax” (GST). VAT, is a general consumption tax, and will apply to most transactions in goods and services. There are a few items exempted from VAT in the UAE. A couple of items are zero-rated and the rest of the items are full rated/standard rated. The criteria for VAT registration will be on the annual turnover of the business entity. The government has tentatively decided to introduce VAT in the UAE by 01 January 2018 with the proposed rate of 5%. Input VAT It is the value added tax added to the price when goods are purchased or services are rendered. If the buyer is registered in the VAT Register, the buyer can deduct the amount of VAT paid from his/her settlement with the tax authorities.

Output VAT

It is the value added tax calculated and charged on the sales of goods and services

Exempt Supply

A supply in which VAT is not charged and for which the related input VAT is not deductible. For example: local transport, bare land, the sale of residential property (second sale onwards) lease of the residential property and certain financial services.

Zero Rated Supply

It is a taxable supply on which VAT is charged at 0% and for which the related input VAT is deductible. For example Education, exports, healthcare, international transport of passengers and goods, the first sale of residential property, medicine, and medical equipment, investment in gold, silver and platinum, crude oil & natural gas etc.

Standard Rate Supply

It is a taxable supply at the Standard Rate 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, come under the standard rated supplies.

Reverse charge mechanism under UAE VAT

In the UAE Value Added Tax the Reverse Charge Mechanism is applicable while importing goods or services from outside the GCC countries. Under this, the businesses will not have to physically pay VAT at the point of import. The responsibility for reporting of a VAT transaction is transferred from the seller to the buyer; under Reverse Charge Mechanism. Here the buyer reports the Input VAT (VAT on purchases) as well as the output VAT (VAT on sales) in their VAT return for the same quarter. The reverse charge is the amount of VAT one would have paid on that goods or services if one had bought it in the UAE. The importer has to declare the amount of VAT under both Input VAT as well as Output VAT categories of the VAT return of that quarter.Reverse Charge Mechanism eliminates the compulsion for the overseas seller to register for VAT in the UAE.

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