VATor value-added tax is a consumption tax levied on goods and services at each stage of its sale. Initiating from the production stage to the final consumer of the product/service, each stage of the value addition chain is liable for tax payment.
VAT is meant for paying a tax at every stage of sale, but the ones who pay the tax can reduce it by receiving the credit at the time of output. This way, VAT prevents the issue of double taxation that existed in the previous sales tax laws.
VAT was introduced as a relief to the conventional sales tax system, where only the retailer collected the tax from the final buyer. The main aim behind the introduction of VAT was to eliminate the presence of double taxation and the cascading effect from the then existing sales tax structure.
VAT in UAE
Value Added Tax was introduced in the UAE on 1 January 2018. The VAT helps the UAE government to rely less on oil and hydrocarbons as a source of income. Moreover, it acts as an alternative of the source of revenue for UAE to provide high-quality public services. More than Dh12 billion is estimated to be generated as additional revenue after the first year of tax implementation. The standard rate of VAT is 5 per cent.
How does it work?
- A business is liable to register for VAT if it reports annual revenues of over ED 375,000.
- It is optional for companies whose revenues fall between Dh1.87 million and Dh3.75 million per annum.
- When a business pays the tax to the government collected from the customer, it receives a refund of the tax paid to its suppliers from the government.
- Certain designated zones of Free zones in the country as defined by the UAE cabinet will be exempted from the payment of tax.
Companies in UAE can register for VAT in the FTA website. FTA is responsible for implementing, collecting and auditing taxes.
There are 3 categories under VAT in UAE:
- 5% Value Added Tax
- Zero-rated supplies
- Exempt supplies
School education and public higher education have a zero-rated VAT, though educational supplies are applicable for VAT. Certain non-preventive healthcare services are liable for tax payment. It is to be noted that domestic passenger transportation is exempted from VAT. Food, beverages, telecommunications and electronic services are accountable for VAT.