The GCC states have maintained a comparatively low tax status for long, making them lucrative destinations for expats. However, the dependency of the economies on oil revenues and piling losses forced the GCC members to introduce VAT. Implemented from 2018, VAT Tax in UAE applies to all taxable supply of goods and services employed during each phase of the supply chain.
What is VAT?
VAT or Value Added Tax, also called Indirect Tax, is a general consumption tax. It is also known as Goods & Service Tax (GST) in some countries. Moreover, around 150 nations follow Value Added Tax, including countries like Canada, Australia, Malaysia, Australia, Singapore, and 29 members of the European Union.
Overview of UAE VAT Tax
Based on the product or service, there are three different types of VAT in UAE. While the standard VAT rate in UAE is 5 per cent, the other two types are zero-rated and exempted. The Exempt or Zero-rate goods do not have any significant effect on the bill calculation. And the buyers do not have to pay any taxes for these supplies.
Who pays VAT Tax?
In UAE, filing VAT is mandatory for any business that receives taxable goods or commodities of over AED 375,000 per annum. Moreover, for companies importing AED 187,500 per annum or less, getting VAT registration is optional. Following this, the firm will pay the tax amount collected from the end-users to the government.
How to Register VAT in UAE?
Steps to register UAE VAT
Businesses are required to complete these steps to get a registration for VAT Tax in UAE:
- Visit the official website of FTA
- Sign up & create a new account
- Begin registration right from FTA’s portal
- Enter the required information
- Submit your application
After this, you will receive your unique Tax Registration Number. You can use the exact Sign-up details to log in on the portal in future. Complete the process by finishing email verification. Then, the businesses receive a notification regarding the generation of the TRN number.
How to Calculate VAT in UAE?
Computing VAT Tax Rate in UAE can be tricky for businesses that are new to the whole process. However, the calculation is quite simple. You have to take two taxes into account. These are:
- Output Tax: It is the amount the company gets as a part of the total selling price of the product.
- Input Tax: This is the amount the buyer pays as a part of the total price of the final commodity or service.
To obtain the total VAT amount, you need to subtract the output tax from the input tax.
Output Tax – Input Tax = VAT
Types of VAT in UAE
As mentioned earlier, the GCC framework has approved the three types of VAT in UAE. Here is a brief description of all these:
Taxable supplies are the products whose prices are affected by the 5% VAT. The UAE government has issued an elaborated list of goods and services falling in this category.
Zero Rated VAT
In this case, the VAT tax rate is zero instead of 5%. The businesses falling under Zero-Rated VAT must display a tax column separately in their invoice with zero value.
By and large, the supply is exempted from VAT if the conditions specified in UAE VAT Act and Executive Regulations are satisfied. The business dealing only in exempted services cannot apply for VAT.
The zero-rate and exempted VAT does not affect the consumers as practically they are not charged any VAT on the supplies offered to them. However, in the case of zero-rated VAT, businesses can apply for the input VAT deductions from the government.
Taxable VAT or Standard VAT
As the name suggests, the Taxable VAT applies to almost every service or product in the industry. The government has enforced a fixed VAT Tax Rate in UAE, which remains at 5%. Furthermore, the invoices generated must showcase the tax value in a separate column. And the final bill amount is calculated after adding tax to the product price.
Zero Rated VAT
Export from Gulf Cooperation Council countries that have not implemented VAT falls under this category. The supplies include all goods, commodities, or passengers commuting internationally. Additionally, it includes transferring products within the UAE.
List of Zero-Rated VAT items
The Federal Decree-Law Number 8 (Article 45) from 2017 has clarified that zero-rated VAT items in UAE include 14 services and commodities. Some of these are:
- Exporting beyond GCC
- Food Items
- Medicine & Medical Equipment
- International & Intra-GCC transport services
- Charity Organizations, etc.
The supplies under this type of VAT in UAE remain unchanged from VAT execution. Moreover, no VAT is levied on supplies under this category. Therefore, there is no input tax, which means one cannot calculate VAT.
List of Exempted VAT Items
The GCC Tax Exempt List relieves the following domains from paying VAT:
- Imports of goods that are custom exempt
- Local passenger transport
- Bare Land
Few Additional UAE Exemptions are:
- Residential buildings other than zero-rated
- Some specific financial services – margin-based
Types of VAT Percentages in UAE
The UAE government has maintained a 5% tax rate on relevant services and goods offered by the businesses in the state. All entities in UAE with VAT registration are required to follow the same taxation percentage.
The only exceptions here are the exempted or zero-rate supplies. Sellers do not have to mention anything on the invoice if they fall under exempted VAT Tax in UAE. However, for Zero-Rate VAT, the VAT Percentage in UAE is at 0% when calculating the total invoice.
Items Exempted VAT in UAE
In the Federal Decree-Law Number 8 (Article 46) from 2017, the UAE government has excluded the following items from VAT:
- Financial Services listed in Federal Decree-Law’s Executive Regulation
- Trade of Unused Land
- Passenger Transport Supply
- Residential Building Supply via Lease or Sale
Difference between Zero-Rated VAT & Exempted VAT in UAE
As discussed in the Types of VAT Percentage in the UAE section, the Exempt and Zero VAT Tax Rate in UAE is quite different. To make this easier, in Exempted VAT, the products traded are not taxable to any VAT rates.
While the Zero-Rate supplies contain goods and services that are taxable, but the tax levied is at 0%. Moreover, businesses registered with VAT and manufacturing Zero-Rate commodities can claim Input Tax deductions.
Requirements for VAT in UAE
Filling an application for VAT Tax in UAE is crucial for any business in the region. Therefore, to complete this phase correctly, follow these steps:
- Trade License for UAE:
Before applying for VAT registration, check your business license. Any company operating in/from UAE must have a Trade/ Business/ Professional/ Commercial license. UAE Economic Department is authorized to issue the business licenses.
Next, you will have to input information about your Trade License. You will have to select 'Yes' or 'No' based on whether you have your permits or not, including the permits provided for Freezones. Additionally, the non-established firms that still have to register must choose the 'No' option.
- Voluntary or Mandatory Registration:
Here you will have to inform the authorities whether you are completing the registration process by their own accord or compulsorily. Furthermore, ‘Voluntary’ registrations are only applicable when the business complies with the VAT requirements.
- Tax Group Status:
This section decides whether or not you will be creating a Tax Group. Additionally, it includes if you will join one rather than creating a new group. You can form a Tax group with two or more legal professionals with UAE citizenship. Furthermore, all members must comply with the control criteria provided by the state regulations. Therefore, you only have to select 'Yes' or 'No' depending on your prospects.
VAT Penalties in UAE
Registered businesses will have to pay the penalties in case of failure to conform with the VAT directives or laws. The amount of these fines varies depending upon the severity of the error. Here are some of the common violations and their penalties:
- Providing Inclusive Prices: This fine is levied when the business or individual fails to provide total prices on the bill. It includes accurate product costs and taxes applied. In such a scenario, AED 15,000 is the penalty amount.
- Transfer Compliance Error: The businesses must follow the prescribed goods transfer procedure or terms. However, in case of violation, the penalty is 50% of the tax amount or around AED 50,000.
- Issuing Tax Invoice: A penalty is levied if the firm misplaces the Tax Invoice or any other paperwork. For every missing document or invoice, the business will have to pay a fine of AED 5,000.
- Issuing Credit Note: Just like Tax Invoices, if the registered company makes a mistake in providing accurate Tax Credit Note, they will have to pay a penalty of AED 5,000 for every paperwork or note missing.
- Compliance to Procedures: If a business fails to adhere to the directives and conditions recommended while issuing electronic Tax Credit Note or Tax Invoices, they are liable to pay AED 5,000 for every inapt document.