Around the world, many governments consider taxes as their lifeblood. While the United Arab Emirates (UAE) still doesn’t levy personal income tax, it has introduced several other types of taxes in the past years. For instance, effective January 1, 2018, the UAE has implemented the value-added tax (VAT). This article seeks to provide a comprehensive guide on VAT in the UAE.
What is VAT in the UAE?
The government levies VAT on the supply of goods and services. It’s an indirect tax on consumption, implying that the end consumer ultimately bears the cost. Meanwhile, registered businesses at each phase of the supply chain act as tax collectors on behalf of the government. The said businesses then remit it to the government, which is crucial in generating revenue for the UAE.
Since the introduction of VAT in 2018 and up to October 2021, the government has gained tax revenues totaling $26 billion (AED7 billion).
Who should register for VAT in the UAE?
If you’re a business in the UAE and the total value of your taxable supplies and imports go beyond AED375,000 per year, then the law mandates you to register for VAT.Â
There’s also a provision for voluntary registration — and that is if the value of your taxable supplies and imports is between AED187,000 and AED375,000 per year. Small businesses that opt to register for VAT enjoy several perks. Apart from reinforcing credibility and trustworthiness, it allows them to reclaim any VAT they incur during their operations.
What are the VAT rates in the UAE?
According to the Federal Tax Authority (FTA), the standard rate of VAT is 5 percent. However, there are certain exemptions. Here are the basic types of supplies with their corresponding taxes in the country.
- Standard-rated supplies. Most goods and services in the country are taxed at 5 percent.
- Zero-rated supplies. Certain supplies have no VAT, including healthcare supplies, educational services, precious metals and goods and services exported to countries beyond the Gulf Cooperation Council (GCC). In this category, taxpayers can still claim any applicable input tax.
- Exempt supplies. These supplies also don’t have tax. Additionally, businesses cannot claim input tax. This category encompasses public transport services, undeveloped lands, residential real estate and certain financial products.
- Deemed supplies. Supplies that don’t fall into any of the categories mentioned above belong to this category. Businesses must charge for these supplies, which typically include business assets sold with no consideration, goods used for non-business purposes on which input tax is claimed and transfer of business assets from the country to other implementing members of GCC (and vice versa).
How does VAT work in the UAE?
VAT in the UAE operates on a multi-stage system, where the tax is applied to goods and services at each stage of the supply chain, but the end consumer bears the overall burden. As mentioned earlier, the businesses at each stage act as the tax collector. The VAT they need to remit to the government is computed by deducting the VAT they paid on purchase.
To understand this better, consider an example involving a manufacturer, a wholesaler and a retailer. The manufacturer who sells a standard-rated product at AED1,000 will charge a 5 percent VAT worth AED50. Since they manufactured the product, they paid no VAT on purchase. Hence, their total net VAT payable is AED50.Â
Now, if the wholesaler purchases from the manufacturer and decides to sell it for 2,000, the wholesaler will charge a 5 percent VAT worth AED100. They will also have to pay AED50 for the product they purchased from the manufacturer. At this stage, their net VAT payable is AED50.Â
If the retailer sells at AED3,000, the VAT charged is AED150. They are also mandated to pay VAT for their purchase from the wholesaler, equivalent to AED100. This leads to a net VAT payable of AED50.
| Sales price | VAT charged on sales (Sales price x 5 percent) |
VAT recovered on purchases | Net VAT payable (VAT charged on sales minus VAT recovered on purchases) |
|
| Manufacturer | AED1,000 | AED50 | 0 | AED50 |
| Wholesaler | AED2,000 | AED100 | AED50 | AED50 |
| Retailer | AED3,000 | AED150 | AED100 | AED50 |
In this system, every business in the supply chain collects VAT on their sales and simultaneously gets a credit for the VAT they have paid on their purchases. This ensures that the VAT at each stage is effectively a tax on the value added by that business. The end consumer ultimately bears the VAT cost, while businesses remit to the government only the VAT on the value they have added — not on the entire value of the product or service.
Read: Economy Middle East Guide: How to submit VAT in UAE
VAT filing and penalties
Compliance with VAT filing is crucial. Registered businesses are required to file VAT returns every quarter. The deadline is every 28th day of the month following the tax period. These returns must accurately report all taxable transactions, VAT collected and VAT paid during the period. Non-compliance can result in substantial penalties.Â
| Type of offense | Penalty |
| Not disclosing the price list on the area of business | AED15,000 |
| Failure to issue a tax invoice, credit note or other relevant document during a supply | AED5,000 for each document |
| Failure to notify FTA about the charge of taxes | AED2,500 |
| Tax evasion | 300 percent of the tax evaded |
Final thoughts
VAT in the UAE is an essential system that aids the government’s revenue diversification efforts. For businesses, their responsibility encompasses charging and collecting VAT, paying VAT on goods or services they bought and filing a VAT return. All of these entail careful financial planning, employing a robust accounting system and implementing appropriate pricing strategies. For end-consumers, the implication is that they would have to deal with an increased cost of living, especially if most of what they consume are standard-rated goods and services.
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