VAT -Value Added Tax – A Brief Guide!

VAT is UAE – Value added Tax….

Talking about the topic of Tax has people shivering in their shoes. Because, tax is an expense! Those of us who work in the UAE are in a way lucky that we do not pay any direct income taxes like in many other countries; sometimes up to 50% of the income…

But when UAE Government announced that VAT will be live in UAE in January 2018, there were certain reactions from the general public.

In this article I will try and provide you my views on:

  • Meaning of Value Added Tax (VAT);
  • Why VAT?
  • VAT in UAE;
  • How VAT will affect you as an individual?
  • How VAT will affect businesses?
  • What should businesses be ready for?
  • What is exempt from VAT?

value added tax vat

What is Value Added Tax? Meaning of VAT:

VAT is a tax charged on the ‘Value Added’ at each point from the the goods being turned from raw material to finished goods. In other words, at each stage when a product’s value is added in the next stage, the amount of change in value is taxed.

Take for example, tax on the value of bread, minus the cost of the raw ingredients; the flour mill is charged tax on the difference between the wheat and the ground flour; and the farmer is taxed on the cost of wheat. This means that tax is split between the producers of a good. (The National)

A value-added tax (VAT) or goods and services tax (GST) is a popular way of implementing a consumption tax in Europe, Japan, and many other countries. It differs from the sales tax in that taxes are applied to the difference between the seller-purchased price and the resale price. This is accomplished by taking full tax on all sales, but refunding the tax difference to the sellers.

Now we all know that GCC countries are preparing to implement value added tax (VAT) and they have signed on unified agreement for VAT setting forth legal framework to introduce VAT in the region. The unified agreement encompasses key principles to implement VAT in a coordinated fashion, however, each GCC member state will promulgate its own local laws based on the guidelines provided by this VAT framework. The UAE Ministry of finance along-with KSA have announced already to introduce VAT from January 01, 2018, which will bring number of challenges to the businesses, so we should start asking ourselves whether we are gearing up to meet these challenges?

Those who are unfamiliar with VAT can find following key points of the unified agreement very useful to build their understanding of VAT and those who have dealt with VAT already in their business, job or even personal life may find these points equally useful to start planning for VAT implementation.

Why VAT?

Gulf countries have always shied away from all types of taxes; however, import taxes are imposed on companies that import goods into UAE. In the past one year, the fall in the oil price has had a humungous impact on the Gulf economies. It seems the gulf countries have lost more than $300 billion due to the fall in the oil prices. This was one ill effect of being reliant on one source of income. The governments have now learnt that it is very important to diversify the economy away from oil and gas. The revenue sources need to be diversified in order that in the future, such shocks can be better absorbed.

UAE government also provides services like hospitals, roads, public schools, parks, waste control, and police which are usually covered through Government budget. However, VAT will provide with a new source of income, which will help in continuing these services at high quality.

VAT is one such source of income which will provide huge impetus to the governments revenue.

How is VAT Calculated?

The following image will explain you in brief on how VAT is calculated:

vat in uae

Image from: MOF

When will VAT be implemented in UAE?

It is said that the VAT will be implemented in the start of January 2018. We are just a year and half away from this as of this writing.

What is the rate of VAT in UAE?

UAE Government has decided to charge 5% VAT and this is said to have a minimal impact on the general public. These taxes are imposed on the companies that sell goods. However, in turn, companies will transfer this burden to the customers. So to say that you will not be affected will be a lie. But the impact is said to be very minimal.

What are the effects of VAT on common man?

# Compared to other parts of the world, 5% seems very modest. One more thing that you should note is that VAT is not charged across the board on all goods and services.

#100 types of staple food, and essential service sectors such as healthcare and education are exempt from VAT. Because, majority of common man’s expenses in UAE are rent, food, healthcare, education and because these are exempt from VAT, the effect will not be drastic.

However, what will be affected are the high-end goods, latest electronics devices, smart phones, cars, jewellery and watches, eating out and entertainments and luxury items. 

It is most likely that commercial property will be subject to VAT. So this means that sale and rent of commercial property to be subject to VAT.

To be frank, the cost of living will slightly move up; but again it will depend on your own lifestyle.

Key Points Of The Unified Agreement For VAT For The GCC Region:

#1. Standard VAT rate of 5% will apply to goods and services unless specifically declared as zero rated or exempted.

#2. VAT registration will be mandatory for businesses with annual revenue over AED/SAR 375,000 (US$ 100,000). Any business having turnover between AED/SAR 187,500 (US$ 50,000) to AED/SAR 375,000 will have option for VAT registration (not mandatory). Businesses with turnover falling below AED/SAR 187,500 will not be required to register for VAT.

#3. Input tax credit right will be granted to the taxpayer providing taxable supplies (standard or zero rated). Businesses having exempt supplies will not be entitled to claim input tax credit. Unregistered businesses cannot charge VAT on sales and cannot claim input VAT on their purchases.

#4. Sectors specified below will be decided by each member state to be declared as either zero rated or exempt from VAT in their local laws;

  • Education;
  • Healthcare;
  • Real Estate;
  • Local Transport.

#5. VAT treatment for following special sectors will be decided individually by each member state and in case not specified otherwise, standard rate will apply;

-Food products falling under the unified list (e.g. basic foods: bread, milk etc.) can be declared zero rated by the member states.
-Medical supplies (equipment and medicines) will attract zero rate at the discretion of each member state.
-Oil and gas sector including oil derivatives can be declared zero rated by individual member states under conditions laid thereon.
-Transport of goods and passengers (intra-GCC and internationally) will be subject to zero rate of VAT.
-Export of goods to jurisdictions outside GCC will be zero rated.
-Financial services’ VAT treatment is left at the discretion of each member state. Revenue from financial services (margin based income e.g. interest and premium etc.) will be declared exempt from VAT as a general rule, however this exemption may not apply to fee based services offered by the financial institutions as defined in the local laws of the member states.
-Free zones’ VAT treatment will be subject to respective laws of member states as they have right to choose their own VAT treatment.

#6. VAT group comprising two or more legal entities resident in the same member state, can be registered as one entity for the purposes of VAT.

#7. The reverse charge mechanism will apply to the supplies taken place in any member state provided by a non-resident supplier (e.g. imports).

#8. The taxable customer in that member state will be liable to settle the tax due.

#9. Tax Period will be determined by each member state and should not be less than one month. Expected tax period for filing VAT returns in UAE is three months.

Above points are mere guidelines only and actual VAT treatment and compliance related requirements will be subject to the national laws of each GCC country.

It is highly advisable to start thinking about VAT implementation sooner rather than later as it is inevitable. Once VAT will become a law, there will be no excuse for this. Immediate actions should be taken by the businesses operating across the GCC region to assess the impacts of VAT on the business and processes (how business is conducted). A comprehensive plan should be developed detailing all the required steps to be followed to become fully compliant with VAT law.

Should all businesses register for VAT with the Government?

Not all businesses will come under the purview of VAT; there is a certain cut off in terms of annual revenue or sales / turnover; any businesses generating sales above this cutoff will need to register for VAT. This cutoff is not yet announced.  This move is to safeguard small businesses.

Tweet from MOF UAE:

What are the effects of VAT on businesses?

First of all, the initial impact of VAT will be on businesses because it is the businesses that are taxed first. The implementation date is mentioned to be January 2018. Some businessmen have said that this may be a bit too early and they may require time to implement it and incorporate it into their financial systems. One thing that is sure is, it will increase the expenses of businesses because they will now need to hire specialist individuals or firms that know the kind of accounting that is required to manage the systems and operations.

Larger companies with considerable level of capital and revenue, this may have a negligible impact; however, for smaller firms, this will be higher expenses and may impact their bottomline.

How should businesses prepare for VAT implementation?

Here is what you as a business should do:

  • Start maintaining your financial records in orderly manner;
  • Businesses will now need to develop more efficient processes;
  • Cost cutting on all fronts that you feel are unnecessary;
  • Restructure your business to incorporate new talent who are able to multi task;
  • Incorporate a robust accounting system that has VAT module;
  • Get professional help for right ways to implement systems;
  • Hire professional CA firms who could do the groundwork or leg work for your business for implementation;
  • Assess capability of existing systems;
  • Identify VAT implementation strategy;
  • Identify contracts that need a VAT action;
  • Identify inter-company transactions;
  • Undertake training / awareness.

 How will Government collect VAT?

Companies and Businesses will be responsible for preparing documentation of their business income and costs and associated VAT charges. 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 from or paid to the government.

What is exempt from VAT?

It was earlier mentioned that 100 essential food items are exempt from VAT; which may include fresh fruits, coffee and tea, wheat and cereal flours, sugar, infant milk foods, uncooked pasta and a range of other basic food items. It is also said that Healthcare and education would also be exempt from VAT. Most food items  that are processed and cooked and foods falling into the luxury goods category such as confectionery, chocolates, soft drinks are expected to be subject to the standard 5 per cent VAT.

How much will government collect through VAT?

It is estimated that UAE government stands to earn around AED 12 billion in the first year of VAT’s application. This is a welcome news for the UAE government which is looking to diversify the economy and income streams away from Oil and Gas related income; it will also ensue a stable economy which is less reliant on oil revenue.

Will VAT be applicable on Tourists and Visitors?

Yes, tourists and visitors are required to pay VAT because UAE relies on tourism for a large part of the economy.

I hope this post has taught you some aspects of VAT. I will be regularly updating this post with new information as and when it is available.

Will I pay VAT on the grocery items?

Younis Al Khouri, undersecretary at the Ministry of Finance, has mentioned that 94 food items are exempt from VAT. As of now we do not have the list of items that are exempt; but it is understood that most of the daily consumables are exempt from VAT. That means, daily essential items will not have Value Added Tax.

Will VAT be applicable on Electronics, Textiles (clothes), Home furnishing etc?

As the above items are non essential, and hence you will be paying a VAT on these items. Let’s say, you are buying a new sofa which costs around AED 3,000. If the value already does not include VAT, you will have to pay extra AED 150 as VAT.

Will my rent increase and would I be charged VAT on my rent?

This is the most common question that I have received when talking to friends and colleagues. I believe that rents will attract an additional charge of 5% VAT. The mechanism can vary. Since the landlord adds value from Nil till your Rental amount, he will have to pay the 5% (in theory)! However, I believe that landlords will pass on this charge to the tenants and our living costs are going to increase for sure.

Will airline tickets cost more?

Most of the countries which already have VAT (GST – Goods and Service Tax), like United Kingdom and Singapore, air tickets are not charged VAT. To be an optimist, I believe air tickets may not attract VAT in UAE.

Will Cost of Living increase?

This will depend on your own lifestyle. If you are used to lavish spending on luxury items, your cost of living will definitely go up.

When should businesses start registering for VAT?

Government is expected to be ready by October 2017 to take in new registrations for VAT. It may also be prior to that date.

VAT Implementation Plan

It is very important to follow phase wise approach to the VAT implementation plan, as shown below, to ensure its proper execution. The plan should be clearly communicated to all concerned within the business to achieve the objective of becoming VAT compliant.

With inputs from Usman Latif.

Some important links:

https://youtu.be/4fOTTVPzbR0

5 Comments

    • Hi Sulesh,

      Your billing system should be updated with addition of VAT addon.
      This will depend on the POS or accounting system you are currently using.

  1. HOW WILL VAT AFFECT THE LOGISTICS COMPANY…WHICH DEALS WITH ALMOST ALL OVER THE GLOBE.A FREIGHT FORWARDER COMPANY IT IS.

    • Deepesh,
      VAT is value added. So if you are providing service through freight forwarding or generating any invoice from your local company, 5% VAT needs to be paid.

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