VAT Consultancy and Advisory

Journey from No Tax to Value Added Tax

All the member states of GCC have entered into the GCC VAT Framework Agreement whereby each member state of the GCC will establish their own separate national legislation. Detailed compliance
requirements along with set of rules will be outlined in respective legislation. UAE is all set for VAT implementation to be effective from the year 2018. Such a huge tax reform makes it much more important to understand the VAT from the scratch and get VAT ready.

What is VAT?

VAT is one of the most common types of consumption tax found around the world as a source of generating revenue to the government. VAT is an indirect tax which is charged on supply of goods and services. VAT is also known as a general consumption tax.

Why VAT?

VAT is implemented by the UAE Federal and Emirate government to help in contributing to the government budgets as a new source of income. These government budgets are in turn used to provide various
public services which includes hospitals, roads, public schools, parks, waste control and police services to the citizens and residents. The VAT tax reform will also help government to achieve its vision of reducing dependence on oil and other hydrocarbons as a source of revenue.

When will the VAT be effective?

According to the UAE Ministry of Finance, VAT will be introduced across the UAE on 1 January 2018.

How VAT will be collected?

VAT will be charged on each step of ‘value added throughout the supply chain’. The businesses in the UAE will act as a tax collector for the government. The end consumers will bear the burden of the tax. The VAT framework is drafted in a manner to avoid ‘cascading effect- tax on tax’. Find below an illustrative example on working of VAT Mechanism:

Product: Leather bags Tax Rate: 5%
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    Raw leather Supplier

    @ AED 1,000

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    Manufacturer

    Leather Bag
    @ AED 2,000

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    Retail Chain

    Leather bags are stocked at retail stores and placed for sale

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    End Consumer

    buys a leather bag @ AED 3,000

Contributors to Supply Chain Sales VAT @ 5% on sales VAT recovered on purchase Net VAT payable/ (refundable)
Raw leather supplier 1,000 50 0 50
Manufacturer 2,000 100 50 50
Manufacturer 3,000 150 100 50
Total VAT to be borne by End Consumer 150

Will the VAT be an excuse to increase in prices by the businesses?

The Rules will be drafted by the government in such a way that the businesses will be required to disclose how much VAT they are charging on each transaction.

How will VAT affect Cost of Living?

VAT is charged at a flat rate of 5% on almost all the goods and services unless specifically exempted or excepted by law. Accordingly, the VAT will lead to an increase in cost of living slightly depending on the individual’s spending behavior. If you are spending more on the exempted products than you are unlikely to see any significant increase.

Feel free to ask for our assistance at vat@nrdoshi.ae for any Value Added Tax (VAT) query.

By CA. Nisha Sanghvi – Sr. Executive Accounts & Audit

NR Doshi

NR Doshi