VAT in UAE & GCC FAQ’s

What is VAT?

VAT or Value Added Tax is one type of general consumption tax that is charged upon goods and services at its every stage till the product reaches its final stage- collected at supply chain and borne finally by the consumer.

How VAT Implementation affect business?

VAT tends to affect all the transaction and so touches every aspect of the organization. VAT majorly affects IT systems, finance, human resources, legal team and even inter-organization transaction.

Who needs to get registered for VAT?

VAT registration needs to be done by such businesses who are dealing in supply of goods or services with annual turnover beyond the threshold.

How does VAT work?

VAT being TAX on consumption is collected at every stage of supply and paid to the government and at actual it is borne by the final consumer on purchase.

Why there is need for VAT advisory cum training?

VAT being easy to understand and complex to executive TAX System does require assistance in form of Advisory or Consultation:

  • Each transaction related to purchase of goods and services needs to be considered for VAT returns (some of them would have standard rate, zero rate or can be exempted as well).
  • Each transaction related to sale of goods and services needs to be considered for VAT filling of TAX (some of them would have standard rate, zero rate or can be exempted as well).
  • Maintaining of accounts changes with the effect of VAT added to the base price and accordingly filling of invoices, receipts etc. changes.
  • ERP systems needs changes to consider VAT addition in the transaction and accordingly training of person required for operating the system.
  • Human resource personal has to appoint or have to start molding staff for VAT.
  • Need for better and timely understanding VAT effects will lead to non- payment of fines.
What are the types of Rates of VAT?

Given are basic rate structures:

  • Standard rate: Standard rate being 5% is to be considered unless goods and services are classified as zero rated. Most goods and services are standard rate. It is the basic/minimum rate which is considered on goods and services.
  • Zero rate: Goods which comes under Zero rates are not exempted from VAT taxation but is having taxable rate as 0% means any input tax which has been directly incurred In the provision of such supplies will be recoverable.
  • Exempted from VAT: These are such goods and services on which no VAT can be charged-
    • Businesses which are partly exempted
    • Partly Exemption of non-business use by business
    • Partly exempt business- records keeping needed
    • Some of the transaction cannot be considered for VAT
What steps needs to be considered for charging VAT?
  • Inbound or outbound transaction with zero or standard rated supply, considerations to be taken
  • Right rate of VAT to be charged
  • VAT to be worked out if single price is shown that includes or excludes VAT
  • Information regarding VAT is to be shown on your invoice.
  • VAT account transaction to be shown with summary of your VAT.
  • Amount to be shown on your VAT return.
VAT – is it a costly affair for businesses?
  • VAT is a type of taxation procedure where business acts as tax collector- they don’t pay or benefit from it.
  • Although MNEs aim for 100% compliance – which we might term paying the right amount of tax, at the right time, to the right tax administration – meeting this goal can prove extremely burdensome in terms of costs and company resources.
  • This places an additional burden on companies as they must adapt their systems for multiple individual requirements that apply essentially the same commercial process.
  • As well as shouldering the task of collecting VAT, businesses must also often fund VAT payments because they must charge VAT before recovering the tax from their business customers.
  • This factor, and the delays commonly experience in receiving VAT credit refunds from tax administrations, especially for foreign VAT, can have an adverse effect on cash flow.
  • Not maintenance of proper VAT administration can lead to payment of fines and extra cost on products bought for reselling.
How VAT will impact retail industry?
  • The most welcomed indirect tax in UAE i.e. VAT is to be collected by the intermediary in this case it would be the retailer from the person or customer who will be bearing the ultimate economic burden of the tax.
  • The retailer must later fill the tax return and will forward the tax to the UAE government from the person or persons i.e. legal or natural on whom it is imposed.
  • Retailers must now keep record of the transactions done, maintenance of invoices i.e. sales and purchase invoices which will be required for filling returns.
Impact of VAT on home buyers?
  • VAT is an add on to the cost price of any product, groceries, or any services taken.
  • As with this increase on the price of goods and services will lead to increase in the cost of day to day home maintenance, and so VAT will be a burden on the homemakers to pay more than before for the same goods and services.
Why is VAT being considered by GCC?
  • Governments have been considering the need to diversify income sources to reduce its dependency on oil and gas sector. Reduced incomes from oil sector has also affected the developments in these regions and thus an alternate means of revenue was required.
  • In such a case, they are going for Indirect tax to provide more facilities to the people with different source of revenue from introduction of VAT.
What obligation VAT is going to bring to businesses?
  • As already known book keeping and maintaining accounting records were not obligatory for businesses in UAE.
  • With the introduction of VAT and TAX obligation businesses are now supposed to keep accounting records and maintenance of commercial book.
  • This will help in clarification of turnover of business and that they are falling in the threshold or not and by keeping records they will be able to showcase the same to the government at the time of TAX audit done.
What penalties will be imposed on business for non-compliance?
  • There can be several penalties that can be imposed on business for non- compliance
    • Legal entity failing to register when they do fall in the given threshold,
    • When the legal entity is unable to submit the tax returns or make payment in the given time,
    • When the legal entity is not able to perform, obligatory record keeping and accounting required issued by the legislation,
    • Tax evasion offences where a person performs a deliberate act or omission with the intention of violating the provisions of the issued tax legislation.
Will there be any VAT that businesses are not allowed to claim?
  • VAT will not be deductible in respect of expenses incurred for making non-taxable supplies. Furthermore, input tax cannot be deducted if it is incurred in respect of specific expenses such as entertainment expenses e.g. employee entertainment.
Under which conditions will businesses be allowed to claim VAT incurred on expenses?
  • VAT on expenses that were incurred by a business can be deducted in the following circumstances:
    • The business must be a taxable person (the end consumer cannot claim any input tax refund).
    • VAT should have been charged correctly (i.e. unduly charged VAT is not recoverable).
    • The business must hold documentation showing the VAT paid (e.g. valid tax invoice).
    • The goods or services acquired are used or intended to be used for making taxable supplies.
    • VAT input tax refund can be claimed only on the amount paid or intended to be paid before the expiration of 6 months after the agreed date for the payment of the supply.
Will VAT be paid on imports?
  • VAT is due on the goods and services purchased from abroad.
    • In case the recipient in the State is a registered person with the Federal Tax Authority for VAT purposes, VAT would be due on that import using a reverse charge mechanism.
    • In case the recipient in the State is a non-registered person for VAT purposes, VAT would be paid on import of goods from a place outside the GCC. Such VAT will typically be required to be paid before the goods are released to the person.
Will the goods exempt from customs duties also be exempt from VAT?
  • It is not necessary that goods exempted from custom duties will also be exempted from VAT and may subject to VAT.

An exhaustive list of FAQs’ can also be viewed from the Ministry of Finance website, please follow the link to read more FAQs’

https://www.mof.gov.ae/En/budget/Pages/VATQuestions.aspx

You may reach us at vat@nrdoshi.ae for any queries