What is VAT?
Value Added Tax (or VAT) is an indirect tax. Occasionally you might also see it referred to as a type of general consumption tax. In a country which has a VAT, it is imposed on most supplies of goods and services that are bought and sold.
VAT will be another source of raising revenues for governments in the Gulf Cooperation Council (GCC).
It is estimated that the UAE will generate more than Dh12 billion additional revenues in the first year after implementation of this new tax.
How does it work?
Will everything be taxed?
The UAE will remain tax-free in many ways even after the implementation of VAT as there is no income tax on salaries in the country. Free zones in the country also offers tax free environment including 100 per cent foreign ownership in free zones, ease of doing business.
The government is likely to use its ability to either zero-rate or exempt many supplies most likely to impact the common man to ensure that the impact of VAT is kept to a minimum.?Essentially, the intentions of most governments when introducing a VAT is to focus more on taxing discretionary spend by consumers, while ensuring that those at the lower end of the spectrum are protected and assisted.
All you need to know
- Date of implementation: January 1, 2018
- VAT rate: 5%
- What are exempted: 100 types of staple food, and other essential service sectors such as healthcare and education
- What are not: Electronics, smart phones, cars, jewellery and watches, eating out and entertainments
- Inflation fears: It will have minimal impact on residents with less appetite for luxury goods, services and lifestyles. It will not stoke inflation for the common man as vital household expenditure items are exempted from its ambit
- Common man: While the impact of tax on property transactions will be limited to the wealthy or those above upper middle income group, a likely hike in the cost of financial services will hit the common man. VAT will also have an effect on the buying power of tourists as they will have to pay duty tax again on certain goods in their country of origin
- Dh12 billion is the estimated revenue to be generated by the UAE through VAT in the first year
Download PDF : VAT in UAE 2018 from here
Will all businesses need to register with the government for VAT?
No, not all businesses will need to register for VAT. In simple terms, only businesses that meet a certain minimum annual turnover requirement will have to register for VAT.
That is, many small businesses will not need to register for VAT. We have made this decision to safeguard small businesses from the extensive documentation and reporting that a system like VAT requires. Also, businesses may not need to register with the government if they only provide goods and services which are not subject to VAT.
Please note that we have not yet finalized the specific conditions (such as minimum annual turnover) that will help identify businesses that do not need to register for VAT. Once that information is finalized, it will be shared with the public.
Download Slides: VAT in UAE 2018 from here
What are the VAT-related responsibilities of businesses?
All businesses in the UAE will need to record their financial transactions and ensure that their financial records are accurate and up to date. Businesses that meet the minimum annual turnover requirement (as evidenced by their financial records) will be required to register for VAT. Businesses that do not think that they should be VAT registered should maintain their financial records in any event, in case we need to establish whether they should be registered.
VAT-registered businesses generally:
- must charge VAT on taxable goods or services they supply;
- may reclaim any VAT they’ve 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
If you’re a VAT-registered business you must report the amount of VAT you’ve charged and the amount of VAT you’ve paid to the government on a regular basis. It will be a formal submission and it is likely that the reporting will be made online.
If you’ve charged more VAT than you’ve paid, you have to pay the difference to the government. If you’ve paid more VAT than you’ve charged, you can reclaim the difference.
When will registration for VAT begin?
If the initial date for the VAT roll-out is followed, businesses can probably start registering for VAT from 1st October 2017. As announced recently, the registration will be open three months before the go-live date. Companies will have the option to register online.
How will the government collect VAT?
Businesses will be responsible for carefully documenting their business income and 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.
How often are companies required to file VAT returns?
For most businesses, VAT returns should be filed every three months. Filing of returns can also be done online using the government’s eServices.
Will businesses be penalised if they don’t collect VAT?
Businesses are encouraged to implement the new tax system, but the Ministry of Finance said that the government is currently in the process of defining the exact fees and penalties for non-compliance.
What other taxes is the UAE considering?
The UAE is not discounting the possibility of collecting other forms of tax. “As per global best practice, the UAE is exploring other tax options as well. However, these are still being analysed and it is unlikely that they will be introduced in the near future. The UAE is not currently considering personal income taxes, however,” said the Ministry of Finance.
Download PDF: FAQ VAT in GCC from here