This article is to give a brief overview of the basic principles of the Value added tax in the UAE.
What is VAT?
Value added tax (VAT) is a tax imposed on consumption, that means the final consumer bear the tax cost while businesses collect the tax and pay them to the Federal Tax Authority (FTA).
How does VAT work?
Businesses that are registered for VAT charge VAT to their customers on supplies of goods or services made in the course of business. Then they are required to collect the VAT which they have charged to their customers and, on a periodic basis, pay it over to the FTA, accompanied by the submission of a tax return.
Business charge their customers with ‘output tax’ which is VAT on sales. Business will also pay VAT to their suppliers when they acquire goods and services, which is known as ‘input tax’ or VAT on purchases.
Generally, registered businesses are able to recover the VAT on purchases, subject to certain conditions, by deducting this input tax from the value of the output tax, and pay the net to the FTA when filing the tax return.
Businesses that are not registered for VAT are not entitled to recover any VAT they incur. As a result, the VAT becomes a cost for them.
UAE VAT rates
There are two VAT rates applicable in the UAE:
- The standard rate of VAT (5%)
- The zero rate of VAT (0%)
These rates are applicable to “Taxable Supplies” which are goods or services supplied for a consideration by a person conducting business in the UAE, and does not include “Exempt Supplies”.
Taxable & Non-taxable supplies
Types of supplies
Standard-rated supplies are taxable supplies that are not zero-rated. They are the majority of goods and services subject to a VAT rate of 5%.
Zero-rated supplies are goods & services accounted for at a VAT rate of 0%, however, such supplies are still treated as “taxable supplies” in all other respects. Subsequently, a business supplying zero-rated goods or services has the right to recover the VAT incurred on their own business expenditure in the same way as they would if they made standard-rated supplies.
List of zero-rated supplies:
- Exports of goods/services to non-GCCs VAT-implementing states
- Gold, silver, and platinum as an investment
- First supply of residential building (sale or rental)
- Education (basic fees and books)
- Preventive and basic healthcare services and related goods and services
- International transport of passengers and goods
- Goods and services consumed or used during the international transportation of goods or passengers
- The first supply of a building specifically designed to be used by charities.
- Crude oil and natural gas.
- Air, sea and land means of transport intended for the transportation of passengers or goods
No VAT is charged in respect of exempt supplies, however, they are not “taxable supplies” which mean that the supplier cannot recover the VAT incurred on expenses related to exempt supplies.
List of exempt supplies
- Financial services: exchange of currency, LC, debt security, equity security, loan, operation of deposit or saving AC, dividend.
- Residential building (other than the first supply)
- Bare land
- Local transport (public)
Supplies outside the scope of UAE VAT
Those are supplies that are neither taxable supplies nor exempt supplies.
- Salaries and wages
- Transactions between businesses within the same tax group
- Sale or purchase of a business as a going concern
- Tips paid above the total charge
- Supplies take place outside the UAE
This information summary is provided for general awareness purposes only and is not intended to replace an accounting, tax, or professional advice. Please seek professional advice before making any decision. We assume no liability or responsibility for any errors, omissions, or inaccuracy in this content.