VAT- Value Added Tax is an indirect tax applied on the consumption of most Goods & Services. It is also referred as the type of General consumption tax. It is implemented on 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 is added 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 evidently known to us 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 will be used 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 will be introduced in UAE at the beginning of the next year, that is by 01 January 2018 FTA said.
What is the VAT rate Imposed?
The proposed standard rate of Value Added Tax in the UAE will be up to 5%. Also, certain supplies of Goods & Services may be either exempt (VAT will not be applied), or zero-rated (0% VAT will be applied to Goods & Services). The standard rate will be applied 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 deeply moved by 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 rated 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-rated supplies in the UAE. Events, conferences, meetings & trade expos, which results in a momentous revenue-generating drive of the tourism sector, Yeah, will be 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 paid on certain Goods & Services purchased in the United Arab Emirates.
Will VAT be paid on imports?
VAT is applied 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 is a VAT registered perfume dealer in the UAE. He Imports perfume from Paris to the UAE for sales. In this case Ali will be obligated for paying VAT under the reverse-charge mechanism, In this case, Ali has to pay tax directly to the tax authority and once done Ali also can claim Input tax credit for this Import
Case 2: VAT shall be paid on Goods which are Imported outside the Gulf if the business owner has not registered for VAT in the state. Usually, this kinda VAT will be paid before the Goods are delivered to the person.
Example: Kadar is a business owner who Imports his goods outside the Gulf countries, but still is not registered under VAT. Then, VAT should be paid to UAE government before the goods are released to Kadar.
Case 3: Import VAT is applied to Goods which is Exported via UAE to other GCC countries. The input tax credit can be claimed 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 Imported to UAE, which is later exported to other Gulf countries. The payback of the input credit recovered via reverse-charge should be done 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 has to pay back the tax credit which he got for 40 refrigerators to Tax Authority of UAE
Will VAT be Imposed on Exports?
No, VAT will not be imposed on Exports, but they must be reported in Tax-returns. Export of Goods & Services internationally that is outside GCC are Zero-rated.
How can VAT returns be filed and when should it be filed?
VAT returns must be filed 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.
Haider has to file VAT returns before 28th of January, 2018 for the October to December 2017 quarter.
How can VAT be claimed?
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.
VAT can be claimed under these scenarios:
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
Input tax paid on expenses related to both taxable and non-taxable/exempt supply is Recoverable on a proportionate basis by the registered 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 may be used 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 is real estate treated under VAT?
VAT analysis of the Real-Estate depends on whether it is a Residential property or Commercial Property. The supply for Residential properties is Tax exempted by the UAE government. Primary Supply of residential properties within three years after the completion has been already Zero-Rated. The sale of undeveloped land is Tax-Exempted. But the supply of a commercial property will be taxed 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 is registered under VAT, they can claim a refund on expenses
The VAT should be charged correctly
Businesses should have proper documents showing that the VAT is paid
VAT input tax refund can be claimed only on the amount paid within 6 months after the supply date
Is there any condition under which VAT incurred on expenses cannot be claimed?
Input tax cannot be deducted for some kinda expenses such as entertainment expenses. VAT will never be deducted from non-taxable supplies. One cannot claim payment of VAT for Customs duty paid at the time of import.
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-Rated?
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
The oil sector and the oil & gas products
Practically, each member state can zero rate or VAT-exempt:
The educational sector
The medical sector
The real estate sector
The local transport sector
Will customs duty be applied once VAT comes into effect?
VAT shall be collected 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-exempted Goods & Services exempted from customs duty too?
Imports can be subjected to the VAT, even when the customs duty is exempted on 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 taxed 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 be declared 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 paid on them. Then, the tax paid by a taxpayer will be equal to Tax collected on output – Tax paid on input i.e; [Sales – Purchases].
How to calculate output VAT & input VAT?
Rahman owns a juice shop in which he had to spend [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 are registered for VAT you can charge Output VAT on your own sales of the Goods & Services, output VAT is the Value Added Tax which can be also calculated. Both businesses & consumers will be charged 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.
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 is considered 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 has earned[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 is earned as output VAT [0.75AED] – input VAT [0.50AED] = [0.25AED]
The Retailer: One who has earned 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 is charged for Imports at the first point of entry into the UAE, at this point customs duty can be also applied.
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.