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VAT

What is Tax ?

Tax is the means by which governments raise revenue to pay for public services. Government revenues from taxation are generally used to pay for things such as public hospitals, schools and universities, defense and other important aspects of daily life.

There are many different types of taxes:

  • A direct tax is collected by government from the person on whom it is imposed (e.g., income tax, corporate tax).
  • An indirect tax is collected for government by an intermediary (e.g. a retail store) from the person that ultimately pays the tax (e.g., VAT, Sales Tax).
  • 2. What is VAT ?

    Value Added Tax (or VAT) is an indirect tax. Occasionally you might also see it referred to as a type of general consumption tax. In a country which has a VAT, it is imposed on most supplies of goods and services that are bought and sold.

    VAT is one of the most common types of consumption tax found around the world. Over 150 countries have implemented VAT (or its equivalent, Goods and Services Tax), including all 29 European Union (EU) members, Canada, New Zealand, Australia, Singapore and Malaysia.

    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 government reflect the ‘value add’ throughout the supply chain.

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

    A sales tax is also a consumption tax, just like VAT. For the general public there may be no observable difference between how the two types of taxes work, but there are some key differences. In many countries, sales taxes are only imposed on transactions involving goods. In addition, sales tax is only imposed on the final sale to the consumer. This contrasts with VAT which is imposed on goods and services and is charged throughout the supply chain, including on the final sale. VAT is also imposed on imports of goods and services so as to ensure that a level playing field is maintained for domestic providers of those same goods and services.

    Many countries prefer a VAT over sales taxes for a range of reasons. Importantly, VAT is considered a more sophisticated approach to taxation as it makes businesses serve as tax collectors on behalf of the government and cuts down on misreporting and tax evasion.

    4. Why is the UAE implementing VAT ?

    The UAE Federal and Emirate governments provide citizens and residents with many different public services – including hospitals, roads, public schools, parks, waste control, and police services. These services are paid from the government budgets. VAT will provide our country with a new source of income which will contribute to the continued provision of high quality public services into the future. It will also help government move towards its vision of reducing dependence on oil and other hydrocarbons as a source of revenue.

    5. Why does the UAE need to coordinate VAT implementation with other GCC countries?

    The UAE is part of a group of countries which are closely connected through “The Economic Agreement between the GCC States” and “The GCC Customs Union”. The GCC group of nations has historically worked together in designing and implementing new public policies as we recognize that such a collaborative approach is best for the region.

    6. When will the VAT go into effect and what will be the rates?

    VAT will be introduced across the UAE on 1 January 2018 at a standard rate of 5%.

    7. How will the government collect VAT?

    Businesses will be responsible for carefully documenting their business income and costs and associated VAT charges. Registered businesses and traders will charge VAT to all of their customers at the prevailing rate and incur VAT on goods / services that they buy from suppliers. The difference between these sums is reclaimed or paid to the government.

    8. Will VAT cover all products and services?

    VAT, as a general consumption tax, will apply to the majority of transactions of goods and services unless specifically exempted or accepted by law.

    9. What sectors will be zero rated?

    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.
  • 10. What sectors will be exempt?

    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
  • 11. Will it be possible to issue cash receipts instead of VAT invoices?

    A supplier registered or required to be registered for VAT must issue a valid VAT invoice for the supply. To be considered as a valid VAT invoice, the document must follow a specific format as mentioned in Article (59) of executive regulation of the Decree Law. In certain situations the supplier may be able to issue a simplified VAT invoice. The conditions for the VAT invoice and the simplified VAT invoice are mentioned in legislation.

    12. Under which conditions will businesses be allowed to claim VAT incurred on expenses?

    VAT on expenses that were incurred by a business can be deducted in the following circumstances:

  • The business must be a taxable person (the end consumer cannot claim any input tax refund).
  • VAT should have been charged correctly (i.e. unduly charged VAT is not recoverable).
  • The business must hold documentation showing the VAT paid (e.g. valid tax invoice).
  • The goods or services acquired are used or intended to be used for making taxable supplies.
  • VAT input tax refund can be claimed only on the amount paid or intended to be paid before the expiration of 6 months after the agreed date for the payment of the supply.
  • 13. Will the goods exempt from customs duties also be exempt from VAT?

    Not necessarily. Some goods that are imported may be exempt from customs duties but subject to VAT.

    14. Is VAT applicable in Export?

    In the case of exports, VAT will be zero rated.

    15. 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.

    16. What are the documents for proof of exports in order to claim VAT?

    As per Article 30 of Executive regulations of the Decree Law required proof of export to zero rate the export sale

  • a. Official evidence – Export documents issued by the local Emirate Customs Department
  • b. Commercial Evidence
  • As per Article 30 of Executive regulations of the Decree Law required proof of export to zero rate the export sale

  • a. The Supplier
  • b. The Consignor
  • c. The Goods
  • d. The Value
  • e. The Export Destination
  • f. The mode of transport and route of the export movement
  • 17. Exports

    When goods or services are supplied from UAE to a person located outside UAE, the supply is called an export. The location of the recipient can be the person's place of establishment or fixed establishment.

    17.1 Are exports taxable?

    Exports are considered as taxable supplies. However, they are zero rated, i.e. tax at 0% is applicable on exports. Additionally, the treatment of exports is based on certain scenarios. These scenarios can be divided as follows:

  • a. Export of goods outside a GCC VAT implementing state
  • b. Export of goods to unregistered recipients in a GCC VAT implementing state
  • c. Export of goods to registered recipients in a GCC VAT implementing state
  • d. Export of goods which require installation or assembly outside the state
  • 17.2 Can input tax be recovered on exports?

    As exports are taxable supplies, input tax can be recovered on supplies used to make exports. If the exporter makes domestic supplies also, the input tax recovered can be used to reduce their tax liability. If the exporter is dealing solely in exports, the exporter can get refund of the tax paid on inputs.

    17.3 Are records of exports required to be maintained?

    Yes, records of exports made are required to be maintained for minimum 5 years from the end of the year to which the invoices pertain.

    For example: An Export Invoice issued on 5th January, '18 should be retained till 31st December '23.

    18. Imports

    When goods or services are received from outside UAE into UAE, the supply is called an import.

    18.1 Are imports taxable?

    Imports are taxable under VAT. When a person registered under VAT in UAE imports goods or services, the importer have to pay VAT on imports on reverse charge basis. This is in addition to customs duty levied on imports. The scenarios of import can be divided as follows:

  • a. Import by a person registered under VAT
  • b. Import by a person not registered under VAT
  • c. Goods trans-shipped via UAE to other GCC countries
  • d. Goods imported to UAE and exported to other countries
  • 18.2 What is reverse charge?

    When a supply is made, usually, the supplier of goods or services is liable to collect and pay tax to the Federal Tax Authority (FTA). This is called forward charge. Under reverse charge, the recipient of the supply is liable to pay the tax on the supply to the Federal Tax Authority. In the case of imports, as the supplier is outside UAE and is hence, not registered in UAE, the liability to pay tax on the import is on the importer registered under VAT in UAE.

    18.3 What is the VAT rate applicable on imports?

    On imports, VAT rate of 5% will be applicable. The only exception is import of precious metals, on which VAT rate of 0% is applicable. The rate of VAT applicable on imports is kept same as the VAT rate applicable on domestic supplies, in order to ensure that imports are taxed equally as domestic supplies.

    18.4 Can input tax be recovered on imports?

    Yes, the tax paid by the recipient of the supply on imports is eligible for input tax recovery if the input VAT is paid against taxable supply

    18.5 Are records of imports required to be maintained?

    Yes, records of imports are required to be maintained for minimum 5 years from the end of the year to which the invoices pertain.

    Hence, exports and imports are integral activities for traders in UAE. Knowledge of compliance under VAT is essential for these businesses to accurately meet the compliance requirements as well as utilize the benefits of VAT.