VAT Implementation in UAE | IMC
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BACKGROUND

Value Added Tax (VAT) is an indirect tax levied on supplies. More than 150 countries around the world have already implemented the VAT. GCC have entered a treaty to introduce and implement VAT and Excise across the GCC to create a wider scope of revenues for the Government. United Arab Emirates (U.A.E) has introduced VAT with effective from 1st January 2018.

MEANING OF INPUT AND OUTPUT OF VAT

Input VAT:
In U.A.E., Input Tax is the “Tax paid by a Person or due from him when Goods or Services are supplied to him, or when conducting an Import”. It is the tax paid by the manufacturer or the producer when procuring raw materials that add value to their finished product. The registered persons are eligible to claim VAT deductions on the input tax paid for delivering the supplies. It is important to note here that, only the input tax incurred in producing or delivering the taxable supplies is allowed to be deducted.

Output VAT:
In U.A.E., Output Tax is the “Tax charged on a Taxable Supply and any supply considered as a Taxable Supply” A person must be registered with the tax authorities for collecting VAT for charging VAT on its supplies. A VAT registered business must charge VAT on the invoices issued for the sale of its goods or services as per the rate applicable in the state. The tax liability of the taxable person is the difference between the input tax paid and output tax charged on the supplies.
The below example shall further clarify the concept of input tax, output tax, tax liability and how VAT operates.

Example:

  • If a trader purchases goods worth AED 20,000 inclusive of the 5% VAT. Later, he sells the products to final consumer for on VAT inclusive price of AED 30,000.
  • Accordingly, Input tax is 5% of AED 20,000 i.e. AED 1,000
  • The output VAT will amount to 5% of AED 30,000 i.e. AED 1500.
  • The difference between the input and the output VAT (1500-1000= 500) AED is tax liability of the business.

MEANING OF SUPPLIES, GOODS AND SERVICES

Supplies: Supplies include all the taxable goods, services or transactions that are taxable either at standard rate or zero tax or exempted from the purview of VAT. The taxable supplies include:

  • All goods and services (sales, transfer of ownership, rentals) come under VAT
  • Transfer of goods from and to other member countries
  • Transfer of good and services from and to other countries of the world.
  • Deemed supplies
  • Import of goods and services.

Goods and services: Any product that sold for a cash or other consideration is goods and services. Goods are tangible, i.e., they have a physical attribute.
Services are nontangible, i.e., they do not have the physical attribute.

RATES

The standard rate for VAT is kept at 5% across GCC. All the supplies shall be subject to VAT at the rate of 5% if they do not fall under the zero rated or exempt category. All the supplies of goods and services will be categorized into three categories for calculation of VAT liability:

Supplies chargeable at a Standard Rate of 5%

The standard rate for VAT is kept at 5% across GCC. All the supplies shall be subject to VAT at the rate of 5% if they do not fall under the below two categories. Renting and Buying of commercial property is an example of supplies chargeable at 5%.

Zero Rated Supplies

The lawmakers understand that certain necessary items should be charges at lowest possible rate to ensure that it will not burn a hole in the pockets of residents. Necessary goods and services e.g. healthcare and education are kept under this category.

Exempt Supplies

The goods and services that will not be subject to VAT are exempt supplies. Local passenger transport, renting of residential property are kept under this category. It is important to note here that the companies providing exempt supplies shall not be required to register for VAT and cannot claim any input credit for the VAT paid on purchases.