A holistic view of VAT OR Value Added Tax

VAT is a tax that is imposed at various stages on domestic consumption. It is charged on taxable goods and services in the UAE. There are some entities which are exempted from VAT. The tax is applicable in various stages of consumption of goods and services in the entire process. The tax is imposed at every stage wherever there is some value addition. It prevents double taxation, and it’s one of the major benefits of VAT.

VAT in the UAE

There is a concept of “Registered Person” in the UAE who is a person registered under the VAT Act 2017. This person is supposed to charge VAT on the taxable supply of goods and services offered to his clients or customers. The inputs that the person incurs for running his business are exempt from tax. He can claim a refund on this tax after the calculations are made and tax payments have been over. Hence, the tax itself should not be viewed as and is not an expense.

There are some players in the construction industry, and they are:

There is a developer who acquires land and appoints a contractor for construction purpose. The main contractor is engaged by the developer for doing the work of construction of a building and other structures. He is completely responsible for the total execution and completion of a project.

There is a subcontractor who is engaged by the main contractor. The subcontractor is to perform a part of the work assigned to the principal contractor. The subcontractors are the plumbers, electricians, masons and so on.

By construction services there it is meant general construction, specific construction activities, building work and civil engineering work. These may include a new set of work, repair work, constructing a prefabricated building and so on. The general construction of all buildings includes residential and commercial buildings. It may also include buildings for office.

The civil engineering works are also included by the rules. The civil engineering works include constructions of motorways, sewerage system, pipelines, electrical supply lines, facilities for outdoor games and sports. Specialized construction activities are also included within the section of VAT regulations. These are demolition work, electrical work, installation of utilities, completion of buildings, etc. these activities have nothing to do with the rest of the project.

In the UAE, all construction services attract VAT. Hence, a contractor has to charge VAT on the work of construction services at the site. It may be for residential or non-residential work.

The contractor has to issue a letter in which he makes his claims on the activities he has performed. It will be taken as a bill for payment, and it will be delivered to the client who will be making the payments. There is a convention here in which the client appoints or engages a civil engineer and an architect to validate the work completed and also to certify the actual value of the work performed by the contractor.

The contractor will also write a letter of claim to the client which talks about the time of supply. This letter mentions the progress of work of construction and the cost of the work done.

When a contractor issues a letter of claim, the letter of claim must be in the form of a tax invoice. It will also contain the amount payable for the work done.

The time of supply of VAT goes as follows:

  • Where a certificate is required, the certificate shall be issued only after the contractor has given the letter of claim.
  • Wherever a certificate is needed, a letter of claim is not as good as a tax invoice. Here the rule is different.
  • A contractor has to submit a tax invoice together with the certificate of the client about his work done. It will corroborate the value of his work for the client.

GCC Filings provides bookkeeping, taxation and services concerning registration of VAT and its return submission. It has the specialization to help the contractors in the UAE engaged in Construction companies there. 

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