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What is VAT?

Value added tax (VAT) is a consumption based tax that is levied on the supply of goods and services. VAT is an indirect tax, till now 150 countries in the world have implemented VAT (or its equivalent Goods and Service Tax) including the 29 European Union members, Canada, New Zealand, Australia, Singapore and Malaysia.

VAT is levied at every stage of value addition. The ultimate consumer has to bear the burden of VAT. Suppliers act as an intermediary between the government and the consumers, who collect the VAT from the consumers and deposit it with the government.

The businesses who are making further taxable supplies can claim the credit of the input tax paid by them to their suppliers. Actual tax receipts to government reflect the value addition throughout the supply chain.

What is the difference between VAT and Sales Tax?

Sales tax is also a consumption based tax. The basic difference between VAT and sales tax is that VAT is charged on every stage of value addition including the final sales. However, sales tax is only imposed on the final sale to the consumer. In most of the countries sales tax is imposed only on the sales of goods; however, VAT is imposed on goods and services both.

VAT is imposed on imports also in order to protect the interests of domestic suppliers of the same goods and services. Generally, VAT is preferred over sales tax as it makes the suppliers serve as tax collectors for the government and reduces the misreporting and tax evasion.

Why is the UAE implementing VAT?

The basic purpose of imposing tax in UAE is to collect the revenue for the budget of the government; in return it provides many services to the citizens such as hospitals, roads, schools, parks, waste control, police and other security services. VAT will provide UAE an additional source of income to maintain the quality of these public services in future also. Also, it will reduce the dependence of the government on the oil and tourism sector.

Why UAE is required to co-ordinate the VAT implementation with other GCC countries?

Gulf Co-operation Council (GCC) is a group of countries which are related to each other by “The Economic Agreement Between the GCC States” and “The GCC Customs Union”. Together the GCC countries have designed and implemented new public policies and we recognize such a collaborative approach is the best for the region.

What is the date of implementation and rate of VAT in UAE?

VAT has been implemented in U.A.E. with effect from 1 January 2018. VAT has two rates; the standard rate of 5% and zero rates i.e. 0%.

How the VAT will be collected by the government?

The businesses making taxable supplies are responsible for proper documentation of the revenues earned and expenditures incurred along with the VAT charges associated with such transactions. A VAT registered supplier will charge VAT from all its customers on making supplies and will pay VAT to his suppliers on making purchases. The difference between these two sums is to be paid to the government by the taxable supplier.

VAT for Businesses

Who can register for VAT?

When the value of taxable supplies and imports exceeds the mandatory threshold limit of AED 375,000 then the business making such supplies and imports should get mandatorily registered. A business may also choose to register for VAT voluntarily if the value of taxable supplies and imports or expenses exceeds the amount of AED 1,87,500. The provision for voluntary registration is given to enable startups with low turnovers to register for VAT.

What are the responsibilities of businesses under VAT?

The businesses in UAE need to record all the business related financial transactions accurately and within time. Businesses crossing the mandatory registration limit are required to get registered under VAT. Even if a business does not find it liable to get registered, the records are to be maintained by it so that the tax authority can establish its tax liability. Proper maintenance of records will help the businesses in claiming the input VAT credit that they have paid on the purchase of goods and services.

Also, the businesses making taxable supplies must collect VAT on goods and services from their recipients. A VAT registered business must report the Federal Tax Authority the amount of VAT charged from recipients and the amount of VAT paid to suppliers. Such reporting will be made online.

If the amount of VAT charged by you is more than the amount of VAT paid by you, then you have to pay the difference to the Authority, but if the amount of VAT paid is more than the amount of VAT charged then you can claim the difference from the Authority.

How a business can get ready for VAT?

VAT has been implemented with effect from 1 January 2018, but still, there are many businesses in UAE that need to get VAT ready to fulfil their tax obligations. That’s why the Federal Tax Authority has relaxed the timeline for filing the first VAT returns, easing reporting and compliance pressure on companies. The FTA provides the first VAT return period from January 1 to May 31, this means the first VAT return will be filed on or before June 28. However, we believe that to fully comply with VAT the businesses should make some changes to their core operations, financial management, book-keeping, technology and perhaps even their human resource mix (e.g. accountants and tax advisors). It is advised that the businesses should align their operations and functioning with VAT regulations to ensure proper and timely reporting of the same. We are guiding businesses on how they can be fully compliant with VAT requirements. However, the final responsibility and accountability to comply with law is on the business itself.

When a business should get registered for VAT?

As the VAT is already implemented in the U.A.E., the businesses that are still not registered and falling under the registration requirements of VAT should get registered now. The businesses making taxable supplies crossing the limit of mandatory registration threshold are liable to get registered. The FTA has already provided the facility of electronic registration for VAT from the third quarter of 2017 on a voluntary basis and on a compulsory basis from the final quarter of 2017.

When a business is required to file VAT returns?

Taxpayers are required to file their VAT returns within 28 days from the end of every tax period. However, in a recent notification the FTA has relaxed the timeline for filing the first VAT return, it has provided the first VAT return period from January 1 to May 31 and subsequently on a quarterly basis. It means that the first VAT return will be filed by all the registered taxpayers on or before June 28 and later returns from June 1 to August 31, September 1 to November 30 and December 1 to February 28.

What are the records that a business is required to maintain?

Businesses are required to maintain the records of all the financial transactions, taking place in the due course of business that will enable the Federal Tax Authority to identify the details of the business activities.

For how long business records are to be maintained?

Business records are to be maintained for 5 years, however in case of real estate business the records are to be maintained for 15 years.

How to determine the place of supply?

The Place-of-Supply determines the applicability of VAT, as UAE VAT is levied only when UAE is the place of supply. The basic rule for the supply of goods says that the place of supply is the location of goods when the supply takes place, however, there are special rules for water and energy, cross-border supplies and real estate. Similarly, the place of supply of services is the place of business of supplier with special rules for cross-border supplies and electronically supplied services.

What is the VAT implication on Real estate sector?

Supply(sale/lease) of residential and commercial properties is treated differently under VAT. Supply of commercial properties is taxable at standard rate of 5%.For residential properties first supply within three years of completion or conversion from non-residential to residential will be taxable @ 0%, otherwise it is exempt. Also, the first supply of a charity related building is zero-rated.

Which sectors are zero-rated?

Following sectors are zero-rated:

  1. Exports of goods and services out of the Implementing states.
  2. International transportation of goods and passengers and related supplies.
  3. Supplies of sea, land and air means of transportation meant for commercial transportation of passengers, and supply of goods and services related to such means of transport.
  4. Supply or import of investment precious metals, having a purity of 99%.
  5. Residential buildings that are supplied within 3 years of their completion or conversion.
  6. Supply of specified education services.
  7. Supply of specified healthcare services.
Which sectors are exempt?

Following sectors are exempt:

  1. Financial servicesthat do not charge an explicit fee or commission.
  2. Residential properties that are not zero-rated.
  3. Bare land.
  4. Local passenger transport.
Is there any margin scheme?

Yes, there is a profit margin scheme stating that VAT is to be charged only on the profits earned on the supply rather than the full value. But, certain conditions must be fulfilled in order to avail this scheme. The conditions attached to the profit margin scheme are as follows:

  • The goods purchased must be second hand or antiques or collector’s item.
  • The goods are purchased from a person not registered for VAT or a person who is taxable but accounted for VAT on the basis of a profit margin scheme.
What is partial exemption and how does it work?

A VAT registered supplier incurs VAT on its purchases that is known as input VAT. He can claim the credit of this input VAT only if he is using these goods and services for making further taxable supplies. There may be cases when the expense relates to a taxable and non-taxable supply at the same time(A supplier selling commercial and exempt residential buildings). In such situations the registered person needs to apportion input tax between the taxable and non-taxable supplies made by him. Businesses can claim the input tax related to the taxable supply in accordance with the methods provided by the Federal Tax Authority.) as a basis for apportionment in the first instance although there will be the facility to use other methods where they are fair and agreed with the Federal Tax Authority.

How transitional rules will affect the VAT liability?

There are various business transactions that were initiated before, but completed after the implementation of VAT. To determine the applicability of VAT on such transactions, transitional rules are specified in VAT decree law and regulations thereby.

If the consideration or part thereof is received by the supplier, or he has issued the invoicefor the supply of goods and services before 1 January 2018; then the date of supply will be the effective of VAT implementation if the following events occur after VAT implementation:

  • Transfer of goods under the supervision of supplier.
  • Placing the goods at the recipient’s disposal.
  • The completion of assembly or installation of the goods.
  • Issuance of the customs declaration.
  • The acceptance of the goods by the recipient.

If a contract is concluded before the implementation of VAT for which supply is to be made after VAT implementation, and such contract does not contain clause related to tax on the supply then the consideration received shall be considered inclusive of tax.

Is it possible to issue cash receipts instead of VAT invoices?

A taxable supplier is required to issue invoices as prescribed in the Executive Regulations. The invoice should follow the format given in such regulations, only in certain specific cases the supplier may issue simplified invoices. Tax invoice by electronic means can also be issued provided the conditions mentioned in the regulations are met.

Is there any VAT that cannot be claimed by the businesses?

VAT paid on expenses that are incurred for making non-taxable supplies cannot be claimed back, as the supplier cannot Passover the burden of tax to the recipient. Also, input tax paid on certain specific expenses such as employee entertainment cannot be claimed back.

When a business can claim input VAT incurred on expenses?

VAT incurred on expenses can be claimed by businesses in the following circumstances:

  • Business is making further taxable supplies.
  • Business must be registered as a taxable person.
  • Business should have the documents showing the VAT paid i.e. tax invoice.
  • The goods or services purchased should be used or intended to be used for making further taxable supplies.
  • Input VAT can be claimed back within 6 months of the date of supply.
Will non-residents be required to register for VAT?

Non-residents that make taxable supplies in the UAE will be required to register for VAT unless there is any other UAE resident person who is responsible for accounting for VAT on these supplies. This exclusion may apply, for example, where a UAE business is required to account for VAT under a reverse charge mechanism in respect of a purchase from a non-resident.

Is VAT levied on imports of goods and services?

Yes, VAT is levied on the imports of all the goods that are liable to VAT if they are liable to VAT in case of domestic supplies. Similarly, services are also liable to VAT on imports provided they are imported by a person for making further taxable supplies. VAT on imports is paid on the basis of reverse charge mechanism.

Will Businesses have to report on their business in each of the Emirates?

It is expected that businesses will need to complete additional information on their VAT returns to report revenues earned in each Emirate. Guidance will be provided to businesses with regards to this.

It is expected that the rules will be relatively straightforward for most businesses and will be based, for example, for B2C transactions, on the location of the transaction (e.g. in a retail environment, the location of the shop).

Is there any provision stating the goods exempt from customs duties are also exempt from VAT?

There is no such provision. Custom duty and Value Added Tax are entirely different and unrelated. Goods that are taxable under VAT will remain taxable even if they are imported duty free.