The VAT is a consumption tax that is introduced to UAE in 2018. This tax is levied on the goods that increase within the supply chain. The consumers are the real VAT payers, whereas this revenue is collected and paid as tax to the government by businesses. Thus VAT is an important source of income for the UAE government. Though VAT is implemented, yet UAE will remain tax-free in several ways. No income tax on salaries is levied. Moreover, this tax is implemented to focus on the discretionary spending by the customer and it doesn’t create a burden on lower-income groups. VAT-free items in the UAE include 100 food items, health, education, bicycles, and social services. Whereas electronics, smart phones, cars, jewellery, watches, restaurant costs, and entertainment services will come under-taxed category.
Types of Supplies Depending on VAT Implementations
- Standard rated supply – a 5% VAT is applied to these suppliers that include sale and lease of commercial property, hotel and restaurant services, repair and maintenance services, etc.
- Zero-rated supply – 0% VAT is implied to these services. They include exports, healthcare, medicines, etc. The invoice for these supplies must have a tax column showing zero rates and zero value.
- VAT exempt supply – absolutely no VAT is applied to them. For example, local transportation, educational institutions, several financial services, etc.
- Out-of-scope supply – these include an overseas supplier or a non-registered entity that is supplying goods and services to an overseas person. They are under out-of-scope for VAT in UAE.
Items that are Exempt from VAT in UAE
The GCC has led down a list of zero-rated goods. This includes:-
- More than 100 food items
- Exports occurring outside GCC.
- Medicine as well as medical equipment
- Transportation through sea, land, and air.
- International and Intra GCC transport services
- Charity foundations
- Investments in gold, silver, and platinum.
- Crude oil and natural gas
Items under exempt category include-
- Bare land
- Local transport
- Sale or rent of residential buildings following the first supply.
- Products based on margins that don’t include the explicit fee, discount, commission, rebate, etc.
- Interest in various forms of lending such as loans, credit, finance leasing, and cards.
- Issue, allotment or transfer of equity or debt security.
- Life insurance and life reinsurance
Some activities are undertaken by government and non-profit organizations and they are exempt from the VAT system. They include –
- Sovereign activities. This is undertaken by the government without any competition with the private sector.
- Activities of international organizations, foreign governments, diplomatic bodies and missions acting without conducting business in UAE.
- Charitable activities
- Activities of non-profit organizations
- Supplies of goods between the business in designated zones.
- Activities that are carried out by the employees during the course of their employment, that includes salaries.
- Supplies between members within a single tax group
Businesses having annual turnover more than AED 375,000 should mandatory register with the VAT systems. Companies having revenue between AED 187,500 and AED 375,000 may or may not have VAT registration in UAE. For exempt supply, the supplier cannot claim a tax refund instead the tax incurred on raw material purchased will be considered as the cost of the product.