The first two member countries of GCC, UAE and the kingdom of Saudi Arabia are introduced to VAT on 1st January 2018. Later, other member countries like Bahrain, Oman, Qatar, and Kuwait by the beginning of 2019 are introduced to Value Added Tax. In the UAE, a 5% sales tax is charged to consumers based on the purchase price of goods and services. This step has been taken by the government to diversify income sources due to the sudden decline in crude prices.
A VAT is a consumption-based tax, imposed at every level of the supply chain, starting with the sale from manufacturer till selling to end consumers. The tax paid on purchase known as ‘Input Tax Credit’ or ‘Input VAT’ is adjusted with the VAT liability tax collected on sales known as ‘Output VAT’.
Consequences Regarding the Implementation of VAT in the UAE
Implementation of VAT in UAE has the following fall out:–
- It has become a new revenue inlet for the UAE government.
- The infrastructure of the nation is improved
- This has reduced non-financial benefits such as civil fraud, corruption, waste, etc.
- The efficiency of business multiplies.
- Through several sales channel, the costs occurred by business entities gets distributed.
- This allowed opening markets for advisory firms that are specialized in VAT terms.
Implementation of VAT doesn’t mean everything will be taxed. It is introduced to focus on taxing discretionary spend by consumers. This intention will keep the burden of taxation away from the lower-income group. UAE will remain tax-free in several ways like no income tax on salaries will be levied. There will be free zones within the country offering a tax-free environment that includes 100% foreign ownership.
Who will pay VAT?
- Companies having yearly turnover more than AED 375,000 need to register under the GCC VAT system, whereas companies having turnover between AED 187,000 and AED 375,000 will have an option to VAT registration.
- Consumers buying non-essential items are liable to pay VAT.
- Realtors need to pay VAT on any sales made or property rented for some commercial purpose.
The VAT costs are endowed by consumers whereas businesses pay the collected revenue as tax to the government.
Supplies under 5% VAT
These are the taxable supplies or standard-rated supplies, with 5% VAT. They include Commercial property for sales or leases, retail purchases, car sales and rentals, hotels and restaurants, as well as repairs and maintenance service.
Supplies under 0% VAT
These are Zero-Rated Supplies in UAE having a 0% VAT. This includes healthcare, medicine, and types of equipment, international transport, the first sale of residential, education, investment in gold, silver, and Platinum, Exports, crude oil, and natural gas.
Supplies unaffected by VAT implementation
These are known as Exempt Supplies and no taxes are charged on them. They include bare land, residential property for leases, residential property from second sale onwards, local transportation and certain financial services.