The Federal Tax Authority (FTA) enacted Federal Decree-Law No. 8 of 2017 to establish value-added tax in the United Arab Emirates. VAT has been applied in the UAE since January 1, 2018.
This page discusses the fundamentals of VAT, including VAT rates, registration, input tax, VAT returns, penalties, and many more
What is VAT in the UAE?
VAT is an indirect tax on the provision of goods and services that is levied at every stage of the supply chain. The VAT is borne by the end customer, while registered taxpayers collect it on the government’s behalf.
Why was VAT implemented in the UAE?
The UAE government already provides great public services such as education, health care, social services, and public transportation. The VAT implementation helps the government to diversify its revenue streams. Furthermore, this massive funding stream supports continuing the high standard of living in the UAE.
What is the VAT rate in the UAE?
FTA has announced a standard VAT rate of 5% . However, the FTA classified a few items and services as zero-rated and exempt supplies, which are tax-free.
How does VAT in the UAE work?
The following example demonstrates how the VAT system in the UAE works:
A manufacturer creates a mobile phone and sells it to a distributor. The wholesaler then sums up the profits and sells them to retailers. Finally, the merchant raises the selling price to make a profit and sells it to the end consumer. It should be mentioned that the FTA charges a 5% VAT on products and services sold in the UAE.
Let’s look at a few numbers to comprehend the tax credit chain better.
| Particulars | Manufacturer | Wholesaler | Retailer |
|---|---|---|---|
Sale price |
AED 100 | AED 200 |
AED 300 |
VAT on sales @5% | AED 5 | AED 10 |
AED 15 |
VAT paid on purchases |
Nil | AED 5 |
AED 10 |
Net VAT payable (VAT on sales – VAT paid on purchases) |
AED 5 |
AED 5 |
AED 5 |
In this case, VAT is applied at all stages of the sale, and the registered seller receives a tax credit (or refund) for the VAT paid on the purchases.
VAT registration in UAE
VAT law in UAE dictates that firms must mandatorily seek VAT registration if the total value of taxable supplies and imports in a year exceeds AED 375,000. Also, businesses in UAE can voluntarily seek registration if the total value of supply and imports or expenditures in a year reaches AED 187,500.
Businesses in the UAE can complete the VAT registration process via the FTA’s website.
Types of Supplies Under UAE VAT Law
In the UAE, VAT applies to many sorts of supplies. The VAT rates are determined according to the nature of the goods or services.
- Standard-rated supplies: These products and services will be subject to 5% VAT.
- Zero-rated supplies are subject to 0% VAT. Taxpayers can, however, claim any applicable input tax. These supplies include education services, healthcare supplies, commodities and services exported from the GCC, precious metals such as gold and silver, and international transportation, among others.
- Exempt supplies: According to UAE VAT law, certain supplies are exempt, thus enterprises do not collect VAT or claim input tax. You cannot collect input tax when selling or delivering exempt goods or services. Exempt goods include residential properties, undeveloped land, public transportation, life insurance, and certain financial services.
- Deemed supplies: These are supplies that do not meet the definition of supply, but enterprises must charge VAT.
Deemed supplies in the UAE include: Business assets were sold without regard.Transferring commercial assets between UAE and other GCC Implementing States, as well as claiming input tax on goods used for non-business purposes. - Supplies that are outside the scope of the project: The FTA excluded certain supplies from the scope of VAT regulation.
Input tax under the UAE VAT
Input tax refers to the VAT paid or payable for the supply of goods or services, or during an import. Businesses in the UAE must preserve the invoice and import documentation to collect the input tax paid on purchases.
VAT records in the UAE
All businesses, registered or unregistered, must maintain documents such as
- Balance Sheet
- Profit & Loss
- Fixed asset records.
- Payroll, Inventory, and Accounting Records for:
- Sales & Purchases
- Payments & Receipts
- Revenues & Expenses
Record-Keeping Requirements for VAT-Registered Businesses
- Maintain records for five years from the transaction date.
- Submit VAT returns and pay VAT liability quarterly to the FTA.
- Deadline for VAT filing and payment: 28th day of the quarter (subject to FTA-designated tax periods).
Impact of VAT on Individuals and Businesses in the UAE
Effect on Individuals
- There is a slight increase in the cost of living, depending on lifestyle and spending habits.
Cost of living on VAT-exempted items will not be affected. - Effect on VAT-Registered Businesses
Effect on VAT-Registered Businesses
- Charge and collect VAT from customers at the applicable rate.
- Pay VAT on goods and services purchased.
- Net VAT liability (VAT collected – VAT paid) needs to be calculated and should be paid to the government.
- Record keeping maintaining the accurate record of all transactions sales, purchases, income, expenses, and other VAT-related taxes is required
Compliance and Penalties
- UAE FTA has certain penalties for failing to comply with VAT laws.
- Federal Law No. (7) of 2017 Tax Procedures contains fines on offenses committed along with tax evasion.
| Nature of Offence | Penalty or Fine |
|---|---|
Not displaying price list in the business place | AED 15,000 |
Failure to issue a tax invoice, credit note or an alternative document during a supply |
AED 5,000 for each tax invoice, credit note or alternative document |
Failure to notify FTA regarding the charge of tax based on the margin | AED 2,500 |
Not keeping goods in a Designated Zone or moving them to another Designated Zone | Between AED 500 to 300% of the tax involved |
Tax evasion |
300% of the tax evaded |
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