Everything you need to know about VAT

Posted on Nov 16, 2017

Everything you need to know about VAT

The Ministry of Finance, UAE recently proposed the new law that allows them to impose a tax on all goods and services at a standard rate of 5%, and it's called Value Added Tax (VAT). By the nature of it, it's a general consumption tax affecting each and every individual of the nation. The announcement perplexed the consumers and business owners alike as they're neither aware of its implementation nor its implication on their business and lives respectively. Still a lot of uncertainties edging among the individual and business community. In this article, we'll bring you about the genesis of VAT and how it impacts you directly.

Value Added Tax or VAT, often referred to as goods and services tax, or GST,  in some countries. This is at core a consumption tax imposed on a product at each stage of production, before the final sale. For instance a computer manufacturer: the company is taxed on all the supplies it purchased to make and produce the computer before it reaches the shelf. Then you, the customer pays the VAT (the tax the company had been liable for during the production process) as a percentage of the total price. VAT is not usually an extra or add-on to the sale price. In the UAE, the tax will be calculated as a percentage of the retail sale price of a product.

One of the main objectives of the UAE Federal Government as well as the respective Emirate Governments for introducing VAT is to generate more revenue for providing enhanced support to the citizens and residents by offering various types of public services – including medical facilities like hospitals, good roads and transportation facilities like metro services, public schools, parks, waste control etc. The expenses of these services are borne by the government from its public funds which are earmarked in the budgets. VAT will provide a new source of non oil revenue for the Emirates which will increase the revenue towards the Government exchequer. The will help the Government for providing better and high-quality public services in the future thereby enhancing the living standard of the public. VAT will also result in the increase in the government non oil revenue which is estimated to be around 2% of the GDP.

The new tax law will amend with the beginning of new yeari.e January 1st, 2018. 

While VAT is not intended to be a tax on business, collecting the tax and remitting it to the government will have significant compliance costs. There could also be cash flow implications. Supply chains need to be reviewed to understand the impact of VAT. VAT costs and accounting obligations will need to be identified so they can be addressed. There are also implications for IT systems. Adapting to VAT will mean updating or upgrading ERP and IT systems and interfaces to correctly capture input and output VAT. Governance frameworks will also need to be reviewed and updated to ensure policies, processes and controls comply - a continue to comply - with VAT legislation.

The VAT rate in the UAE is fixed at 5% and is levied on the supply of all goods and services, including food, commercial buildings and hotel services, if no explicit provision is made to impose a zero rate or an exemption. The zero rate is imposed on some goods and services, including health and education services, the supply of investment gold, the first supply of residential buildings, and the supply of international transport of passengers and goods, and exports. Activities exempt from tax include bare land, local transportation of passengers, the supply of residential buildings and the supply of some financial services.

The Ministry decided to implement VAT in different phases. In the first phase, The ministry announced that businesses that provide taxable goods or services, with annual revenue of more than Dh375,000 will be required to register. Businesses with taxable supplies below Dh375,000 but over Dh187,500 will have the option to register, it said.

The UAE has had a strong legacy of implementing ambitious projects. Residents and nationals have always been positively impressed with the capacity of the UAE government to anticipate the future.

Implementation of VAT is the vision, which would whether transform into great policy or not, only time will test but the execution and implementation of it, is solely dependent on the efforts of the whole nation. 


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