Gulf Co-operation Council (GCC) countries have agreed ‘in principle’ to the GCC VAT Agreement to implement VAT (Value Added Tax) in the region. VAT is a type of indirect tax and the most common type of consumption tax found around the world.
VAT is charged at each step of the ‘supply chain’. End consumers generally bear VAT cost while registered businesses collect and account for tax, in a way acting as a tax collector on behalf of the Federal Tax Authority.
Synopsis of VAT in UAE with Compliance & Requirements
VAT, a general consumption tax, will apply to most transactions in goods and services. Only a few items are exempted from VAT in the UAE. A couple of items are zero-rated and the rest of the items are standard rated. The criteria for VAT registration is based primarily on the annual turnover of business entity. The government has decided to implement VAT in UAE by 1stJanuary 2018. The standard rate of VAT in the UAE is 5%.
Output VAT is the value added tax calculated and charged on the value of sales of goods and services.
Input VAT is the value added tax paid by a business to the supplier of goods and services when goods are purchased or services are rendered. If buyer is registered in the VAT Register, the buyer can deduct or claim refund of input tax paid on his purchases.
An exempt supply is a supply on which VAT is not applicable and for which the related input VAT is not deductible / non-refundable.
For example: bare land, local transport, sale of residential property (second sale onwards) and lease of the residential property.
Zero rated supply
A zero-rated supply is a taxable supply on which VAT is charged at 0% and for which the related input VAT can be claimed as refund from FTA.
Standard Rate Supply
A taxable supply at the Standard Rate is a supply on which VAT is charged at 5% and for which the related input VAT is deductible. All items which are not falling under exempt and zero rated category are covered under standard rated supplies.
Reverse charge mechanism under UAE VAT
In the UAE- VAT, the Reverse Charge Mechanism is applicable while importing goods or services from outside the GCC countries. Under this mechanism, businesses will not have to physically pay VAT at the point of import.
The responsibility for reporting of a VAT transaction is shifted from the seller to the buyer; under Reverse Charge Mechanism. Here the buyer reports the Input VAT (VAT on purchases) as well as the output VAT (VAT on sales) in their VAT return for the same quarter. The importer has to disclose the amount of VAT under both Input VAT as well as Output VAT categories of the VAT return of that quarter.
Reverse Charge Mechanism eliminates the obligation for the overseas seller to register for VAT in the UAE.