Federal Tax Authority (FTA) issued Federal Decree-Law No. 8 of 2017 to implement Value Added Tax in United Arab Emirates (UAE). VAT in UAE has been implemented w.e.f 1st January 2018.
VAT is an indirect tax imposed on the supply of goods and services and is charged at each stage of the supply chain. The end-consumer bears the VAT while registered taxpayers collects the tax on behalf of the government.
The UAE government already delivers excellent public services, including education, healthcare, social services, public transportation, etc. The VAT introduction allows the government to diversify the income sources. Further, this huge revenue source ensures continuing the good standard of living in the UAE.
FTA announced a standard VAT rate of 5%. However, the FTA categorised a few goods and services under zero-rated supply and exempt supplies where no tax is charged.
The below example explain how the VAT system in the UAE works:
A manufacturer who produces a mobile phone and sells it to a wholesaler. Then, the wholesaler adds up the profit and sells the same to a retailer. Finally, the retailer increases the selling price to add the profit and sells it to the end consumer. It is to be noted that FTA charges a VAT rate of 5% on selling goods and services in the UAE.
Let's take a few numbers to understand the tax credit chain better.
|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 example, VAT is applied at every stage of the sale, and the registered seller receives a tax credit (or refund) on the VAT paid on purchases.
VAT law in UAE mandates that businesses must mandatorily obtain VAT registration if the total value of taxable supplies and imports in a year exceeds AED 375,000. Also, businesses in UAE can voluntarily obtain registration if the total value of supplies and imports or expenditures in a year exceeds AED 187,500.
Businesses in UAE can complete the VAT registration process through the FTA’s website.
There are different types of supplies under VAT in UAE. The VAT rates are decided based on the nature of the goods or services.
Input tax means the VAT paid or due to the supply of goods or services or during an import. Businesses in UAE shall keep the invoice and import documents to claim the input tax paid on the purchases.
All businesses, registered and unregistered, must retain records such as
Also, the UAE VAT- registered businesses must keep the records for five years from the transaction date.
VAT-registered businesses shall submit the VAT return and make payment of VAT liability every quarter to the FTA. The registered taxpayers must complete VAT return filing and VAT payment before the 28th day from the end of the quarter. However, the FTA may assign a different tax period to a certain group of taxable persons.
The introduction of VAT impacts both individuals and businesses in the UAE. Here's how:
Implication on individuals:
The cost of living can increase slightly; however, it varies depending on that person's lifestyle and spending behavior. Suppose they spend mainly on things exempted from VAT; they won't see any significant increase in the cost.
Implication on businesses:
The VAT-registered businesses shall charge and collect VAT to all of their customers at the notified rate. Also, they shall pay VAT on the purchase of goods and services. When filing a VAT return, they must arrive at the net tax liability (difference between the VAT collected and paid) and pay the same to the government.
All these can be done when all transactions have been recorded accurately. Hence, businesses must record all transactions related to sales, purchases, income, costs, and related VAT charges.
FTA has a right to impose penalties and fines on taxpayers whenever there is any violation of VAT law or rules. The Federal Law No. (7) of 2017 on Tax Procedures listed the penalties for violating UAE VAT law and tax evasion in UAE.
The below table explains the nature of the offence and its related penalties:
|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|
What is the VAT of UAE?
VAT is an indirect tax imposed on the UAE's supply of goods and services. It is charged at each stage of the supply chain.
Who is exempted from VAT in UAE?
Exemption from VAT in UAE is notified for specific supplies. They include undeveloped lands, residential properties, life insurance, public transport, and certain financial services.
Who shall register under UAE VAT?
The businesses whose total value of taxable supplies and imports in a year exceeds AED 375,000 must mandatorily obtain VAT registration.
How is VAT calculated?
When filing a VAT return, businesses must arrive at the net tax liability, i.e., the difference between the VAT collected and paid, then pay it off to the government.
What is a VAT invoice?
In the UAE, every VAT-registered seller must issue a tax invoice when selling taxable goods or services.