UAE VAT FAQ – Get your GCC VAT Questions Answered

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What Is VAT?

VAT- Value Added Tax is an indirect tax applied to the consumption of most Goods & Services. It also refers to as the type of General consumption tax. Vat implementation of the product at every stage of production before the final sale. At every stage in the supply chain, businesses collect VAT on behalf of the government. Because it adds to the customer’s purchase price, ultimately it is the end consumer who pays VAT.

Why Is the UAE Implementing VAT?

One of the main reasons for ‘why  United Arab Emirates is implementing VAT is evident to all. The first prioritized reason can be generating more revenue for the government itself. Also, VAT is going to be the new source non-oil revenue for the UAE. This revenue gets by the government to offer different types of public services, good transportation facilities, better roads, public schools, parks, waste control, medical facilities and more.

when will go into effect?

The VAT gets the introduction in UAE at the beginning of the next year, that is by 01 January 2018.

What is the VAT rate Imposed?

The standard rate of Value Added Tax in the UAE is up to 5%. Also, certain supplies of Goods & Services may be either exempt (VAT will not be applied), or zero-rate (0% VAT apply to Goods & Services). The standard rate shall apply to all Goods & Services that do not fall under an exempt or zero-rated Goods & Services category.

Will this affect the cost of living?

An Individuals cost of living is deeper and move according to his own lifestyle, thus the impact of the VAT is gonna change between individuals. But still, there’s gonna be a slight increase in overall cost of living, Whilst, an Individual who is likely to spend mostly on Exempt & Zero rate products are not going to feel any sort of increase.

Will VAT be applicable for the Tourist?

Yes, In short tourist are applicable for VAT in the UAE. The Travel & Tourism is an important industry of the National Economy. VAT rates will change in different sectors, though. The Travel & Tourism sector can be classified down into several components, such as education, meetings, luxury, medical, health-care, exhibitions, education, events & other groups of special interest. It is normal that Health-care & Education will fall under Zero-rate supplies in the UAE. Events, conferences, meetings & trade expos, which results in a momentous revenue-generating drive of the tourism sector, Yeah, it is taxable.

At present, the UAE is doing a practical study for the Tourist Refund Scheme where Visitors & Tourists will be able to claim a refund on VAT pay on certain Goods & Services purchased in the United Arab Emirates.

Will VAT impose on imports?

VAT applies to any goods & Services that are purchased from abroad. All the major Goods & Services that are made available in the UAE are Imported mainly from Europe & Asia. And only a very few come from other Gulf countries. Just to make it easier to know.

Take a look at these examples:

  •  Case 1: VAT would be due for an Import using a reverse-charge mechanism if the business owner in the State is a registered person with FTA- Federal  Tax Authority
    • Example: Ali registers for VAT, and he is a perfume dealer in the UAE. He Imports perfume from Paris to the UAE for sales. In this case Ali impose to pay VAT under the reverse-charge mechanism, In this case, Ali has to pay the tax directly to the tax authority and Ali also can claim Input tax credit for this Import
  • Case 2: VAT shall be paid on Goods which Imports outside the Gulf if the business owner not yet register for VAT in the state. Usually, this kinda pays before the Goods delivers to the person.
    • Example: Kadar is a business owner who Imports his goods outside the Gulf countries, but still he did not register under VAT. Then, VAT should be paid to UAE government before the goods are released to Kadar.
  •  Case 3: Import VAT applies to export Goods via UAE to other GCC countries. The input tax  credit claims in the final destination member state and this tax credit cannot be  claimed in UAE
    • Example: Asif is a furniture distributor, he exports furniture to all the Gulf countries via UAE. In this case, he is applicable to Import VAT but, Asif can only claim for input VAT at the destination state and it is mandatory to pay VAT in the UAE
  • Case 4: Import VAT is applicable for Goods which are previously Import to UAE, which later exports to other Gulf countries. The payback of the input credit recovery via reverse-charge is at the tax authority of UAE
    • Example: In a case where Omar is the owner of a refrigerator business in the UAE & Saudi. He had Imported 100 refrigerators to UAE, out of that he Exported 40 of them to Saudi. Then Omar pays back the tax credit which he got for 40 refrigerators to Tax Authority of UAE

Will VAT Impose on Exports?

No, VAT imposes on Exports, but they get the report in Tax-returns. Export of Goods & Services internationally that is outside GCC are Zero-rate.

How can you file Vat return and when to file it?

File VAT returns considering the specifications in the VAT Law before 28 days from the end of tax period which will be on quarterly basis. Taxpayers are also having the benefit of filing their Returns online using E-services.

For Example: 

Haider has to file VAT returns before 28th of January, 2018 for the October to December 2017 quarter.

How can we claim VAT?

VAT Registered businesses whose input VAT is more than their output VAT should state it out on their tax returns that they are likely to receive VAT discount.

You can claim VAT under these scenarios:

  • The Input tax paid on expenses related to taxable supply is fully recoverable by the registered VAT person
  • Input tax paid on expenses related to non-taxable/exempt supply may not be recoverable by the registered VAT person
  • And the Input tax paid on expenses related to both taxable and non-taxable/exempt supply is Recoverable on a proportionate basis by the registering VAT person. The registered person needs to apportion their input tax between the taxable and non-taxable/exempt supplies.

 Businesses will normally use input tax as a basis for allotment. Rest of the methods only gets use, if they are fair and finalized upon by the Federal Tax Authority (FTA).

 What is a VAT group?

Businesses will be able to register as a VAT group if it satisfies the specifications forwarded by the Federal Tax Authority of UAE. A VAT group acknowledges Entities  & People that are closely knitted organizationally, economically & financially to operate as a single VAT user.

How VAT treats real estate?

VAT analysis of the Real-Estate depends on whether it is a Residential property or Commercial Property. The supply of Residential properties is Tax an exempt as per the UAE government. Primary Supply of residential properties within three years after the completion is already Zero-Rate. The sale of plain land is Tax-Exempt. But the supply of a commercial property will have tax at 5% the (Standard VAT rate).

What are the circumstances in which businesses can claim VAT incurred on expenses?

Businesses can claim VAT under the following circumstances:

  • If the business registers under VAT, they can claim a refund on expenses
  • The VAT charge  must be correct
  • Businesses must have proper documents showing that the VAT payment is clear
  • You can claim VAT input tax refund only by the amount paid within 6 months after the supply date

Is there any condition under which VAT incurred on expenses can’t have a claim?

Input tax cannot stay as deduct for some kinda expenses such as entertainment expenses. No deduction of VAT from non-taxable supplies. One cannot claim payment of VAT for Customs duty paid at the time of import.

For example:

Mr Haris the manager of a company in Dubai takes his team out for dinner, he will not be able to claim input tax credit.

Which sectors is Zero-Rate?

  Zero-rated supplies include:

  • Exports of goods and services to outside the Gulf countries.
  • International and the Gulf transport
  • Supplies for certain sea, air, and land means of transportation
  • precious metals for investment
  • Newly constructed residential properties
  • Some educational services and some relevant goods & services
  • Certain health-care services and associated goods & services
  • Certain eatables
  • The oil sector and the oil & gas products

Practically, each member state can zero rate or VAT-exempt:

  • Educational sector
  • Medical sector
  • Real estate sector
  • Local transport sector

Will customs duty apply once VAT comes into effect?

VAT gaining on the value of goods including the value of customs duty. Customs duties will be applicable under VAT, so the answer is YES.

Are VAT-exempt Goods & Services exempt from customs duty too?

Imports will subject to the VAT, even when the customs duty stays exempt from some goods. VAT & Customs duty is two different independent Taxes so, Not necessarily is what we have to say.

Who requires to register for VAT?

A business should register for VAT only if their tax supply & imports become more than [375,000AED] the registration limit for registration.

A company can register VAT under two conditions they are:

  • If the supplies & imports of the business are less than the registration limit set by the FTA but higher than the registration limit of [187,500AED]
  •  When company expenses cross the registration limit set by the Federal Tax Authority.

How will business owners calculate their VAT?

In the VAT compliance, you can deduct input VAT from output VAT. The resulting amount must declare to your regional tax office. As you can see, you pay tax to the state on the value your enterprise has added to the Goods. In transparent words If the purchases exceed sales in any one of the periods, the difference will be negative & it will be refunded.

Businesses should track their Sales & Purchases expenses including the Tax set on them. Then, the tax paid by a taxpayer will be equal to Tax receives on output – Tax paid on input i.e; [Sales – Purchases].  

An Example:

How to calculate output VAT & input VAT?

Rahman owns a juice shop in which he spends [100,000AED] for obtaining raw materials. The input VAT rate is 5%, so the input VAT you pay is 5% of [100,000AED] = [5,000 AED]. Now after selling juice, he makes sales of [200,000AED]. Let 5% be the output VAT, the output VAT you pay is [10,000AED].

So, net VAT to be paid by you is  [10,000AED] – [5,000AED] = [5,000AED].

How does the VAT works?

If you have register the VAT you can charge Output VAT on your own sales of the Goods & Services, output VAT is the Value Added Tax which also calculates. Both businesses & consumers charge with Output VAT on their sales. In fact, the Input VAT is set-out on the amount you pay for the valuable Goods & Services you get. You can also take-away the amount of VAT from the Tax Authority, and you can add & charge VAT to the value of Goods & services that you provide. Once you have done you have a benefit for reclaiming VAT incurred on Goods & Services.

Read What Is UAE VAT? Why do you want to Register VAT in UAE?

An example for understanding:
SalesCalculationVATTotal
Juice Manufacturer[10.50AED][0.50AED][0.00AED][0.50AED]
Fruits Distributor[15.00AED][0.75AED][0.05AED][0.25AED]
Juice Shop[20.00AED][1.00AED][0.75AED][0.25AED]
Total VAT paid by the end-consumer[1.00AED]

The End-Consumer pays & bears the VAT cost and VAT are collected through the supply chain.

  • The Manufacturer: One who trades the raw materials (fruits) and charges 5% [0.50AED] on this particular deal,  this sales price considers as an output tax (VAT) to the wholesaler. In this role he has not earned any input tax on his purchases, he will have to pay a net VAT amount to the tax authority of [0.50AED]. which is [0.50AED] output VAT – [0.00AED] input VAT = [0.50AED]
  • The Distributor: Who earns [0.50AED] as an input tax on his purchase from the Manufacturer and will charge a 5% of VAT [0.75AED] when he sells as an output VAT to the Juice shop. Hence, the distributor has a net VAT payable [0.25AED] to the Tax Authorities. (which earns as output VAT [0.75AED] – input VAT [0.50AED] = [0.25AED]
  • The Retailer: One who earns an input tax of [0.75AED] when brought from the distributor. Then the juice shop charges a 5% of VAT as an output tax [1.00AED] on its sale to the final consumer. Hence the juice shop will have the net VAT payable of [0.25AED]. Which is output VAT [1.00AED] – input VAT [0.75AED] = [0.25AED] payable to the Federal Tax Authority of UAE.
  • The Consumers: One who bears the full burden of the Value Added Tax to the Federal Tax Authority (FTA), which is [1.00AED] in this case.

VAT charges for Imports at the first point of entry into the UAE, at this point customs duty, may also apply.

How can UAE Civilians claim VAT?

The UAE  government will introduce a scheme giving portion for UAE nationals to reclaim VAT, In a case where they can claim VAT on building a new residence for their purpose or their families. They can claim VAT for contractors, building materials, services and in related expenses. These are the instances in which civilians can claim VAT even if they are not registered for VAT.

Which sectors would be VAT exempt?

  • The supply of certain Financial services
  • Sale of bare land
  • Sale or Lease of a residential property
  • Local transport

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