Value Added Tax (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 levied 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 was introduced in the UAE on 1 January 2018. The rate of VAT is 5%. VAT will provide the UAE with a new source of income which will be continued to be utilised 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.
Why VAT is an important for your business?
VAT provides new source of income, which help to the continued provision of high quality public services in the future. It also helps the government to accomplish its vision of decreasing dependence on income derived from oil and other natural resources.
Tax is an important because government raise revenue to pay for public services.
VAT is a tax on consumption. From January 1st, 2018, all companies supplying goods and services in the UAE, and the wider Gulf region, had to register for and charge VAT. In the UAE, the rate is 5%. This is changed to a sales tax because it is charged all along the supply chain, so many business-related transactions will be technically subject to this tax even though it is the final consumption by consumers.
In fact, around 130 countries charge it, yet at 5% the UAE rate is one of the lowest in the world. Consumers in Denmark, Hungary, Croatia, Norway and Sweden pay VAT at 25% or more. UAE is one of the lowest rate of VAT.
Four VAT instructions before start business in UAE
At 5%, VAT may be moderately low. Here’s what we’ve learned and what it means for your business.
1. Deadlines for VAT: Back in October 2017, the UAE Federal Tax Authority (FTA) set deadlines for VAT registration. In short, all businesses had to be signed up to the online system by December 4th, 2017. Failure to do so would leave the business in violation of the tax law under the Cabinet Resolution Number 40.
Despite this, as of late February 2018, reports in the media suggested 90,000 of the required 350,000 companies have yet to do so.
2. Pricing troubles: Not everyone has had it so easy though. By early January 2018 reports started to emerge that some businesses were taking advantage of the 5% tax to hike their prices.
Take vendors and retailers as an example. The price we see should be comprehensive of the VAT and the receipt should show the failure of the tax. However, some consumers took to twitter to show pictures of receipts that exposed a different story. While 5% had already been involved in the price, a further 5% was being added at the checkout.
3. Small business punishment: There are reports that freelancers and start-ups are finding life just that little bit harder since VAT was announced. This is because some companies are refusing to work with unregistered businesses.
Any small business with revenues less than AED 375,000 doesn’t have to register for VAT, although it can choose to do so as long as its revenue exceeds AED 187,000. But this also means that businesses which don’t reach the AED 187,000 figure don’t have a tax registration number (TRN). This is causing a sticking point because we’ve heard that some suppliers and customers are now questioning for one anyway.
4. Regional exclusions exist: There was some confusion at the start of January about whether VAT would apply equally to tax-registered businesses in the mainland and the free zones. As things turn out there was no simple answer.
Out of the 45 free zones in the UAE, 20 have been given an exception. These include some free zones in Abu Dhabi, Dubai and Sharjah. Relocation of goods between the zones is also VAT-free, as long as the products are not used.
Criteria for registering for VAT
A business must register for VAT if its taxable supplies and imports exceed AED 375,000 per annum.
It is optional for businesses whose supplies and imports exceed AED 187,500 per annum.
A business house pays the government, the tax that it collects from its customers. At the same time, it receives a refund from the government on tax that it has paid to its suppliers.
Foreign businesses may also recover the VAT they incur when visiting the UAE.
How is VAT collected?
VAT-registered businesses collect the amount on behalf of the government; consumers bear the VAT in the form of a 5 per cent increase in the cost of taxable goods and services they purchase in the UAE. UAE imposes VAT on tax-registered businesses at a rate of 5 per cent on a taxable supply of goods or services at each step of the supply chain. Tourists in the UAE also pay VAT at the point of sale.
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 transfer of goods between designated zones are tax-free.
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. Before filing the VAT return form on the portal, make sure you have met all tax returns requirements.
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 within the specified time frame 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. In case any information regarding VAT service Accounting or Auditing – don’t hesitate to contact with us any time.