What is Value Added Tax (VAT)?
Value Added Tax (VAT) is a form of consumption tax that is enacted on goods and services as they pass down various stages in the production process. Businesses in UAE collect VAT from customers and remit it to the government. The VAT thus helps the UAE government generate a reliable source of revenue, which is put into use in boosting economic prospects and providing superior-quality goods and services for the people of UAE. Vat registration UAE experts help you.
Standard VAT rates in UAE
VAT was brought to the UAE on 1 January 2018. The standard rate is 5% and applies across the majority of goods and services, such as entertainment, electronics, hotel services, food and beverages, utility bills, cars, and others.
VAT Registration: Criteria and Thresholds
There are three kinds of registration options for business owners in UAE. It includes:
- Mandatory registration: Registration for VAT is mandatory if you are a business operating within the bounds of the Gulf Cooperation Council (GCC) and are involved in the sale of goods/services to the UAE. VAT is applicable when:
- The company’s taxable gross revenue – the value of the goods and services that it supplies and any imports, but excluding any exempt supplies (some financial services, life insurance, specific property transactions and local passenger transport) – exceeds AED 375,000 in a 12-month
- The company expects that its taxable revenue will grow to exceed the amount of AED 375,000 within the next thirty days.
This threshold is inapplicable to foreign businesses.
- Voluntary Registration: A business that does not meet the criteria for mandatory registration is still eligible for registration if it chooses to, provided that:
- The company’s gross turnover exceeded AED 187,500 in the past twelve months
- The company expects that its turnover is set to exceed AED 187,500 within the next thirty days.
- In addition, a company is able to register voluntarily if their expenses exceed the voluntary registration threshold, i.e.:
- Its total expenses have exceeded the amount of AED 187,500 in the past twelve months
- The company expects that its total expenses are set to exceed the amount of AED 187,500 within the next thirty days.
This latter option is specifically aimed at enterprising new firms who have not yet gained solid footing in their market of goods and services.
VAT applies to the sale of goods and services made in the UAE by a taxable person in the course of business. It is also inclusive of imports of goods and services into the UAE.
Businesses that have registered for VAT are bound to charge VAT (output tax) on their supplies, unless they are exempt or zero-rated, and account for the VAT they collect from customers on tax returns made to the FTA. Businesses are also able to reclaim the VAT they pay their suppliers (input tax) on their tax returns.
Responsibilities of VAT-Registered Businesses
Maintain tax records
Businesses are obliged to keep official tax records going back a minimum of five years, in accordance with the Executive Regulation on Tax Procedures (2017).
Issue tax invoices
They are responsible for issuing authentic tax invoices to the consumers of their goods and services, and maintaining these records.
Ensuring timely tax returns
Businesses must file tax returns within the three quarterly periods approved by the FTA, or comply with specified durations if the FTA chooses to set them.
Ensuring timely payment of taxes
All due dates of payable taxes must be duly met by registered businesses.
Penalties and Audits
Non-compliance with VAT regulations may lead penalties and fines. The FTA may conduct audits to ensure the upholding of VAT laws and rules, so it is best to be prudent about your bookkeeping and records.
Exceptions to VAT payment
There are a few exceptions in the payment of VAT:
- The VAT rate is approximately zero percent (0%) for goods and services that are being exported outside the bounds of the GCC member states. It is also 0% for international transportation, crude oil/natural gas, the first supply of residential real estate, investment-grade metal and specialized fields such as healthcare and education.
- Persons may be categorized under “zero-rating” export of services if their stay in the concerned territories is less than a month and is not well-connected with the supply of those particular services/goods.
- VAT exemptions are applicable to specified financial services such as life insurance and its subsequent reimbursement. Further, official transactions in bare land and domestic passenger transport are also exempt from VAT.
The legalization of VAT has improved UAE’s economic growth by expanding the government’s revenue sources and bringing the UAE up to par with international taxation standards. As long as VAT policies are closely regulated, and companies’ performances are duly monitored, VAT can continue to be a source of benefit for the economy.