VAT stands for Value Added Tax, and it made its debut in the GCC block, consisting of six nations, in the year 2018. The fact is that, though people have a general idea about what it means, there are still a lot of aspects about it that are not clear.
Important Features of VAT in UAE
So, what exactly is VAT in UAE?
The VAT is an important source of revenue for the governments under GCC (Gulf Cooperation Council). The six countries have reached the decision to implement this tax as a part of their efforts towards diversifying the revenues due to a steady decline in the oil prices.
It has been a recommendation by the International Monetary Fund to consolidate finances by diversifying government revenues and reducing subsidies. Since the year 2018, five percent of VAT has been levied in UAE.
The way it works
The companies in UAE that have annual revenue of more than Dh 3.75 million will have to get registered under the VAT system of GCC. The companies that have annual revenue of Dh 1.87 million and Dh 3.75 million will be given an option to register for Value Added Taxes during the initial phase of implementation.
Regardless of the revenues reported, it will eventually be mandatory for all the companies in the region to have their registration under this system before the second phase of implementation is rolled out.
Will VAT be levied on everything?
The implementation of VAT does not mean that everything will be taxed from now onwards. The free zones will continue to be tax-free business environments that allow complete foreign ownership for companies. And, just as there is no income tax levied on salaries, there will be no VAT implemented on it as well.
The government has exempted many goods and services from VAT to ensure that common people do not feel too much pressure from it. Basically, the intention of the government is to levy a tax on the discretionary spending by the consumers, so that the lower-income group remains away from any burden of taxation.
So, the government has exempted over a hundred food items, social services, education, and health from VAT.
The things that to be taxed
The VAT is levied on watches, jewelry, cars, smartphones, electronics, entertainment, and restaurants, among others. In fact, some of the beverages that are considered detrimental to health, such as the ones with high sugar content, will also be taxed.
How will VAT affect businesses?
If you deal in goods and services on which VAT is charged, you will have to reclaim the tax that you incur on the costs. When you take part in such activities that are not taxed under VAT, and you can’t reclaim VAT you incur on costs, it will come as a cost for your business. The supplier will charge the Value Added Tax, which you are unable to reclaim.