Overview of VAT

Value Added Tax or VAT is a tax on the consumption or use of goods and services levied at each point of sale. VAT is a form of indirect tax and is used in more than 180 countries around the world. The end-consumer ultimately bears the cost. Businesses collect and account for the tax on behalf of the government.

VAT in UAE

Value Added Tax (VAT) was introduced in the UAE on 1 January 2021. The rate of VAT is 5 per cent. VAT will provide the UAE with a new source of income which will be continued to be utilized to provide high-quality public services. It will also help government move towards its vision of reducing dependence on oil and other hydrocarbons as a source of revenue.

Implication of VAT on individuals

VAT, as a general consumption tax, will apply to the majority of transactions in goods and services. A limited number of exemptions have been granted. As a result, the cost of living is likely to increase slightly, but this will vary depending on an individual's lifestyle and spending behavior. If an individual spends mainly on those things which are relieved from VAT, he is unlikely to see any significant increase. Based on this information, individuals can decide whether to buy something.

Implication of VAT on businesses

Businesses will be responsible for carefully documenting their business income, costs and associated VAT charges. Registered businesses and traders will charge VAT to all of their customers at the prevailing rate and incur VAT on goods/services that they buy from suppliers. The difference between these sums is reclaimed or paid to the government.

VAT-registered businesses generally:

Must charge VAT on taxable goods or services they supply.

may reclaim any VAT they have paid on business-related goods or services

Keep a range of business records which will allow the government to check that they have got things right.

VAT-registered businesses must report the amount of VAT they have charged and the amount of VAT they have paid to the government on a regular basis. It will be a formal submission and reporting will be done online.

If they have charged more VAT than they have paid, they have to pay the difference to the government. If they have paid more VAT than they have charged, they can reclaim the difference.

VAT in GCC

The UAE coordinates VAT implementation with other GCC countries because she is connected with them through 'The Economic Agreement between the GCC States' and 'The GCC Customs Union'.

Criteria for registering for VAT

A business must register for VAT if its taxable supplies and imports exceeds AED 375,000 per annum.

It is optional for businesses whose supplies and imports exceed AED 187,500 per annum.

On which businesses does VAT apply?

VAT applies equally on tax-registered businesses managed on the UAE mainland and in the free zones. However, if the UAE Cabinet defines a certain free zone as a ‘designated zone’, it must be treated as outside the UAE for tax purposes. The transfers of goods between designated zones are tax-free.

Filing a tax return for VAT

At the end of each tax period, VAT registered businesses or the ‘taxable persons’ must submit a ‘VAT return’ to Federal Tax Authority (FTA). A VAT return summarizes the value of the supplies and purchases a taxable person has made during the tax period, and shows the taxable person’s VAT liability.

Liability of VAT

The liability of VAT is the difference between the output tax payable (VAT charged on supplies of goods and services) for a given tax period and the input tax (VAT incurred on purchases) recoverable for the same tax period. Where the output tax exceeds the input tax amount, the difference must be paid to FTA. Where the input tax exceeds the output tax, a taxable person will have the excess input tax recovered; he will be entitled to set this off against subsequent payment due to FTA.

How to file VAT return?

You must file for tax return electronically through the FTA portal: eservices.tax.gov.ae.

When are businesses required to file VAT return?

Taxable businesses must file VAT returns with FTA on a regular basis and usually within 28 days of the end of the ‘tax period’ as defined for each type of business. A ‘tax period’ is a specific period of time for which the payable tax shall be calculated and paid. The standard tax period is:

Quarterly for businesses with an annual turnover below AED150 million

Monthly for businesses with an annual turnover of AED150 million or more.

The FTA may, at its choice, assign a different tax period for certain type of businesses.

Failure to file a tax return

Failure to file a tax return within the specified timeframe will make the violator liable for fines as per the provisions of Cabinet Resolution No. 40 of 2017 on Administrative Penalties for Violations of Tax Laws in the UAE.