What is VAT Tax in UAE, and How Does it Work?

VAT, or value-added tax, made its debut back in 2018 when GCC announced 5% for the companies who are reporting over 3.75 million Dh annually. The tax was introduced by the Federal Tax Authority on both individuals and businesses. We all do understand the importance of taxes for the economy. It is equally important for the citizens to understand all/any applicable taxes as well as pay promptly. Let us provide you with a detailed guide on what is VAT tax in UAE, and how does it work?

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What is VAT Tax?

The public sector of any country is responsible for running the economy as well as the social drives of the country. To run these public sector departments smoothly, taxes are collected from individuals and businesses. The government uses this collected money to run the public sector. Our public education institutes, hospitals, infrastructure, defense departments, etc. everything runs through the collected taxes. Some taxes are directly collected by the government from the individuals making money such as income tax, etc. The other type is the indirect tax that is collected through intermediary units such as retail stores, and the taxes that fall under this category is sales tax, VAT tax, etc.

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VAT Value Added Tax

VAT is implemented at every stage of the supply chain for the goods and services that are bought and sold in any country. While the VAT is added to the final cost for the consumer, at different stages of the product/service lifecycle, the end consumer has to pay for it.

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The businesses or individuals who produce and sell the goods and services are only responsible for collecting the tax on behalf of the government and adjusting their accounts to reflect the collections from end consumers as well as payments made to suppliers on behalf of the end consumer.

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If you are wondering whether you paid sales tax or VAT on the last good you purchased or the service that you availed of, it might have been both. While the sales tax applies to the last step of selling the goods or services, VAT is applied to all stages of the product or service production and is collected at the end.

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Who is responsible for VAT collection?

It is probably one of the most decent ways of collecting and reporting taxes. Instead of individuals, businesses bring goods or services to the end consumer in the market. This is a more reliable approach and can help to avoid any misrepresentation of numbers or evasions of taxes.

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Why is VAT collection important for the UAE government?

It helps the government to generate enough income for the smooth operations of public sectors. It also helps to reduce the dependence on oil reserves of the country. This is a better alternative to just relying on the natural reserves of the country.

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Does everyone pay VAT?

Not really, there are few exemptions announced by the government where individuals or businesses are not required to pay VAT. As an example, in real estate, the supplies for commercial construction are VAT applicable; however, the supplies for residential construction are VAT exempt. There is a separate section of Zero Rated Supplies that explains everything about VAT exemptions.

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How does VAT work in UAE?

Like other applicable taxes in the country, VAT also requires certain steps which are to be followed for an error-free system of tax reporting and collection. Here is a basic flow of how VAT collection and filing work in the UAE:

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Business/Individual VAT Account Registration

Businesses or individual who does not fall under zero-rated supplies exemption and make earnings of 3.75 million Dh annually are required to register for the VAT collection. For those who are earning more than 1.875 million Dh per annum, for now, it is optional; they may choose not to register for VAT.

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Collection of VAT

Once a business is registered with FTA through the online portal, all business transactions with end consumers contain the 5% VAT of each stage of the supply chain of goods or services. The tax is paid to the supplier by the business on behalf of the end consumer, and the tax is collected from end consumers on behalf of the UAE government.

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Filing of VAT Return

After each tax year, the business is required to file a tax return to consolidate the amounts paid to different stakeholders. Depending upon the consolidated numbers, either the business pays a differential amount to the government, or the subsequent payment of VAT is adjusted if the business has already paid more than the actual numbers.

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Tenure of VAT Filing

There are standards tax periods, such as Businesses operating with more than 150 million Dh per annum must file the VAT return monthly- Businesses operating with less than 150 million Dh per annum must file the VAT return every quarter Federal Tax Authority of UAE may choose to define a different tax filing period for specific businesses/cases who fail to comply may lead to penalties and/or fines.

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How does VAT impact individuals/businesses?

VAT will impact an individual if the consumption trends include most of those items that are not VAT exempted. Therefore, VAT helps to drive the spending behavior of individuals, which in the long run may help the economy to boost the consumption of certain items or vice versa.

In the case of businesses, they work as a reliable intermediary between government and individuals for a more accurate and error-free collection of taxes. To have smooth business operations, the chances of fraudulent sales/VAT collection are way less than individual income tax reporting and collection.

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Altogether, VAT is helpful for a more reliable structure of tax collection, leading to better facilitation by the government at so many levels. Therefore, it should be the prime responsibility of the businesses to come forward, register for VAT, and help the government with the collection of VAT. 

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Disclaimer 

This article is written in general terms and, therefore, cannot be relied on to cover specific situations; the application of the principles set out will depend upon the particular circumstances involved. We recommend that you obtain professional VAT advice before acting or refrain from acting on any of its contents.