Overview of VAT in the UAE

GCC (Gulf Co-operation Council) countries have agreed ‘in principle’ to the GCC VAT Agreement to levy
VAT (Value Added Tax) in the region. This will help the region to reduce their dependence on oil and
other hydrocarbon products as a source of revenue. It is agreed by all the GCC countries that VAT will be
introduced in every country latest by 1st January 2019. However, UAE decided to implement VAT likely
w.e.f 1st January 2018.

We believe the decision to implement VAT would cause a paradigm shift in the business dynamics of the
country as well as the region. Like most of the countries across the world, businesses in the Gulf region
also will now have to adhere to stringent VAT regulatory and statutory compliances and report the same
on a periodic basis. The challenge for the business community in the Gulf will be to understand the new
VAT Law and implement the same well before the due date.

VAT is one of the most common types of consumption tax found around the world. Over 150 countries
have implemented VAT. It includes the European Union (EU), UK, Canada, New Zealand, Australia,
Singapore, Malaysia, India etc. USA, GCC countries and some other countries, especially from African
continents, have not introduced VAT.

General Principles of VAT

Value Added Tax (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 or distribution/sales. It is usually
implemented as a destination-based tax. It is also known as goods and services tax (GST) in some
countries.

VAT, a general consumption tax, will apply to most transactions in goods and services. There are only 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 or 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. The
proposed rate of VAT in the UAE is 5%.

Input VAT

Input VAT 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

Output VAT is the value added tax calculated and charged on the sales of goods and services.

Exempt Supply

An exempt supply is a supply on which VAT is not charged and for which the related input VAT is not
deductible.

For example: bare land, local transport, the sale of residential property (second sale onwards) lease of
the residential property and certain financial services.

Zero-rated supply

A zero-rated supply is a taxable supply on which VAT is charged at 0% and for which the related input
VAT is deductible.
For example exports, healthcare, education, 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

A taxable supply at the 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.

Reverse charge mechanism under UAE VAT

In the UAE VAT, 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 shifted 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 disclose 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 obligation for the overseas seller to register for VAT in the
UAE.

Compliance requirements under VAT

VAT Registration Threshold.

If the Annual Turnover of the company is more than AED 375,000/, it is mandatory for the company to
register under UAE VAT before the end of the year 2017.

If the Annual Turnover is between AED 187,500 & AED 375,000/, it is optional for the company to be
registered under UAE VAT law. Further, if it is less than AED 187,500/, the company need not register
under this law.

For the startups, if the VAT attracted expenses are more than AED 187,500/, (USD 50K) such companies
have to be registered under the UAE VAT law.

The threshold mentioned above will be calculated as follows:

The total value of supplies made by a taxable person for the month in which he is applying for VAT
registration and the previous eleven months.

The total value of supplies of the subsequent 30 days on which he is applying for VAT registration.

If in any of the above two options, the turnover is more than AED 375,000/- the company has to register
for VAT.

For arriving the turnover for VAT registration purpose, value of exempted supply will not be considered.

Who is a Taxable person under GCC VAT Agreement?

Taxable Person means any person who is conducting an economic activity for the purpose of generating
Income.

• Such person is registered or obliged to register for VAT as per the registration threshold in a member
state.

• Taxable person can include businesses located outside the GCC territory.

• Taxable person can be any individual person conducting an economic activity.

Registration for VAT

A taxable person as per the UAE VAT law can register in the third quarter of the year 2017. It is
mandatory to get registered by every taxable person under the VAT registration platform before the end
of the year 2017.

What is Tax Group / VAT Group?

Member State may allow 2 or more persons that are residents of the same member state to register for
VAT as a Tax Group. Such group will be treated as a single taxable person for compliance of UAE VAT
law. Entities can register as VAT Group if:

• Each person has a place of establishment or a fixed establishment in the UAE.

• The persons are “related parties” and

• Either one person controls others, or two or more persons from the partnership control the others

Entities within one VAT Group are treated as one entity for the UAE VAT purpose.

Supplies made between members of a VAT Group will not be considered as a transaction under UAE
VAT. Further, one entity cannot be part of more than one VAT group.

Record Keeping

It is mandatory for every taxable person to maintain books of accounts under UAE VAT law. In addition to
that the authority can ask for additional documents such as, annual accounts, general ledger, purchase
day book, invoices issued, invoices received, credit notes, debit notes, VAT Ledger etc.

Under the UAE VAT law the books of accounts and records are to be maintained for five years.

Frequently asked Questions

1.What is tax?

Tax is a compulsory contribution by individuals and corporate to the national Exchequer by means of
which government authority finances their expenditure for public services.

There are mainly two types of taxes:

A direct tax – collected by the government from the person on whom it is imposed (e.g., income tax,
corporate tax).
Indirect tax – collected by an intermediary (e.g. a retail or wholesale store etc.) from the person that
ultimately pays the tax (e.g., VAT, Sales Tax, GST, etc.) and paid to the government.

An indirect tax – a tax paid to the government by one entity in the supply chain, but it is passed on to
the consumer as part of the price of a good or service. The consumer is ultimately paying the tax (e.g.,
VAT, Sales Tax, GST, etc.) by paying more for the product.

2.What is VAT Tax?

Value Added Tax (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 or distribution/sales. It is usually
implemented as a destination-based tax. It is also known as goods and services tax (GST) in some
countries.

VAT is one of the most common types of consumption tax found around the world. Over 150 countries
have implemented VAT all over the world. It includes all the 28 countries who are members of the
European Union (EU) apart from Britain, Canada, New Zealand, Australia, Singapore, and Malaysia. USA
does not have VAT.

VAT is charged at each step of the ‘supply chain’. Ultimate consumers generally bear the VAT cost. The
Businesses act as tax collector for the government authorities. They collect, account and pay the tax to
the government.

A business pays the government the net of the tax. I.e. the net amount after deducting the tax paid to
the suppliers from the tax collected from the customers. This net result is that tax revenue to a
government authority that reflects the ‘value added’ throughout the supply chain.

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

For the public, there may not be any noticeable difference between the VAT & Sales Tax. But there exist
some key differences. In many countries, sales taxes are only imposed on transactions involving goods.
Further sales tax is imposed only on the final sale to the consumer. This contrast with VAT is that it is
imposed on goods and services in an incremental manner and is charged throughout the supply chain,
including on the final sale. In other words, VAT is levied on both producer and consumer where as Sales
Tax is levied only on the end consumer. VAT is also imposed on imports of goods and services and hence
it ensures that business interest on price levels of the domestic providers of those same goods and
services are considered. VAT needs strict accounting practices and system in the business where as Sales
Tax doesn’t need require such strictness. The chance of tax evasion is much less in case of VAT as
compared to Sales Tax where tax evasion is rampant and difficult to detect.

4.Which tax system is preferred by Governments in different countries? VAT or Sales Tax? And why?

Many countries prefer VAT over sales taxes for a variety of reasons. One of the main reasons is
that VAT is considered as a more sophisticated approach to taxation in addition businessmen acts as tax
collectors on behalf of the government and thereby generates good revenue for the government.
Further VAT significantly reduces tax evasion.

5.What will be the rates of VAT in UAE?

The proposed rate of VAT in the UAE will be up to 5%.

6.What will be the mechanism of Government to collect the VAT from each customer?

The significance is that each VAT registered business entity becomes automatically the agent of the
government to collect from customers and pay it back to the Government Authority. VAT is charged at
each stage of the ‘supply chain’. Ultimate consumers generally bear the VAT cost. The Businesses act as
tax collector for the government authorities. The difference between the VAT charged on customers and
the VAT paid to suppliers will be either paid to or reclaimed from the government.

7.Why VAT is going to be implemented in UAE?

One of the main objectives of the UAE Federal Government as well as the respective Emirate
Governments for introducing VAT is to generate more revenue for providing enhanced support to the
citizens and residents by offering various types of public services – including medical facilities like
hospitals, good roads and transportation facilities like metro services, public schools, parks, waste
control etc. The expenses of these services are borne by the government from its public funds which are
earmarked in the budgets. VAT will provide a new source of non oil revenue for the Emirates which will
increase the revenue towards the Government exchequer. The will help the Government for providing
better and high-quality public services in the future thereby enhancing the living standard of the
public. VAT will also result in the increase in the government non oil revenue which is estimated to be
around 2% of the GDP.

8.When will VAT be implemented in UAE?

The Federal Government has tentatively decided to introduce VAT in the UAE by 01 January 2018

9.Will UAE VAT cover all products and services?

VAT, as a general consumption tax, will apply to the majority of transactions in goods and services. Some
specific items like the sale of bare land, local transport etc. are exempted from VAT.

10.Whether the cost of living will increase in UAE?

The hike in price depends upon the sector of the product and services which are taken into account for
consideration. The burden of VAT or any other form of taxation needs to be borne by someone – either
the business or consumers or both. The market will decide whether the consumer will bear the cost or
the trader/manufacturer. Naturally, in the case of sellers’ market, the traders will impose the tax burden
to the end consumers and to that extent the cost of living of the individuals is likely to increase. But, in
the case of buyers’ market, the cost of VAT will automatically borne by the trader/manufacturer to some
extent. They cannot pass it to the consumers fully.
In short, there is a likelihood that the cost of living may go up in the UAE. But this will vary depending
upon the individual’s spending pattern and lifestyle.

11.When can business entities start registering for VAT?

As per information available from the official site of the Ministry of Finance, UAE, registration
for VAT will be opened to the business entities in the third quarter of the year 2017. Business entities
will have the option to use online registration service.

12.When are the VAT returns to be filed?

As per the official site of Ministry of Finance, UAE, majority of the business entities will be required to
file the VAT returns on quarterly basis, within one month/28 days from the end of the respective
quarter.

13.Whether UAE tourists also have to pay VAT here?

Every customer, irrespective of the fact whether he is a resident or a tourist, has to pay UAE VAT if he is
consuming the VAT applicable goods or services.

14.Who will all come under VAT registration?

The requirement of VAT registration is based on the annual turnover of each company. It is mandatory
for a business enterprise to register for VAT if its annual turnover is above $ 100,000/ (Hundred
thousand USD). However, the registration for VAT is optional in case of business units having annual
turnover between USD 50,000/ and USD 100,000. The Government has made this decision to safeguard
small businesses from the cumbersome procedure of extensive documentation and reporting system
that is going to be implemented under UAE VAT.

15.What are the responsibilities of business entities once VAT is implemented?

All business entities in UAE:

a) Registered for UAE VAT or not should maintain proper records of their business transactions and
ensure that all financial records are accurate and up to date.

b) Should register under UAE VATif they are coming under eligibility criteria based on turnover.

c) All UAE VAT registered business entities should charge VAT on taxable goods or services they supply.

d) All UAE VAT registered business entities may reclaim any VAT they have paid on goods or services
within the country.

e) Should maintain correct and accurate business records for government scrutiny to ensure that that
business entities adhere to the mandatory requirement stipulated by the UAE VAT Law.
f) All VATregistered business entities must report the amount of VAT they collected and the amount
they paid to the government on a regular basis. The Tax authority will open an online portal for
submitting this record on a periodic basis (called VAT return).

If VAT charged on customers are more than the amount charged by the supplier and service providers,
then the excess amount collected has to be paid to the VAT authority. Similarly, if the amount of VAT on
the purchases and service providers are more than the amount charged on customers, the refund can
be claimed for the difference

16.Whether business entities have to prepare anything in advance for VAT? If so what are those?

Every business unit in the UAE should get prepared well in advance before the due date
of VAT implementation:

a) Check whether they come under the mandatory VAT registration category or not.

b) For complying with the VAT requirements, every organization has to make necessary changes to their
existing financial management and accounting system, accounting software, and sometimes even to
their core operation style.

c) Human resource training will be necessary to update and upgrade the staff to equip themselves to the
new UAE VAT regulatory requirements.

17.Whether Income Tax will also come into effect in UAE?

As per the information available from media, the UAE government is not considering of introducing
personal income tax in the country.

18.What will be impact on UAE economy once VAT is implemented?

a) VAT implementation will strengthen UAE’s economy. It is expected to contribute around 2% of the
GDP of the country in the first year of implementation.

b) It is a bold move on the part of the authorities of the country and will bring about a paradigm shift in
the revenue stream of the country i.e. from oil sourced revenue to non oil sourced revenue.

c) It will be additional revenue for the government to meet its future social service requirements.

d) Inflation in the country may go marginally up.

19.What is the VAT liability of a registered business entity?

The total VAT amount charged by the business entity from its customers (output VAT) are to be
reconciled with the total VAT amount paid/payable by it, to the suppliers on a periodical basis. The
excess amount charged over the paid/payable amount is the VAT liability for the business entity and are
to be paid to the government within stipulated time; one month from the end of the quarter.
20.What are the VAT exempted items in UAE?

From the information, available from the ministry of finance, bare land, local transport, sale of
residential property (second sales onwards), residential lease rent etc. are exempted from VAT in the
UAE.

21.Whether UAE VAT is applicable in the service sector?

Yes, it will be applicable in service sectors as well.

22.Is VAT applicable in Export?

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

23.Is VAT applicable for the construction industry?

VAT is applicable to the Construction industry in the same way as they are applicable to the other
industries.

24.What is the effect of VAT in existing long Contracts?

The contracts already signed before the date of implementation of VAT and which are likely to be
extended to the period in which VAT is applicable are to be revised to take into account of VAT impact.

25.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.

26.Who is a Tax Agent in the UAE?

Tax agent in the UAE is a person who is listed in the Register of Tax Agents at the Authority. For this
purpose, he should be licensed from the Ministry of Economy and from the competent local authority
from each emirate. All matters related to the professional conduct of a tax agent will be filed with the
Register of Tax Agents. A taxable person can appoint a Tax Agent in the UAE and such Tax Agent will be
acting on behalf of the Taxable person on all his tax matters with the Federal Tax Authority.

27.How to file a Tax Return in the UAE?

As per Article (8) of Federal Law No. (7) of 2017 on tax procedures, every taxable person shall prepare
and submit the tax return for each tax period to the authority and need to settle the payable tax within
the timeframe specified in the tax law. Return filing must be done through online portal. The time frame
for filing the VAT Return will be mentioned in the UAE VAT Regulations/ UAE VAT Law. We Emirates
chartered accountants Group will support the businesses to file Tax Return / VAT Return.