VAT is an indirect tax on the consumption of goods and services in the economy. Revenue is raised for government by requiring certain businesses to register and to charge VAT on the taxable supplies of goods and services
VAT is one of the most common types of consumption tax found around the world. Over 150 countries have implemented VAT (or its equivalent, Goods, and Services Tax), including all 29 European Union (EU) members, Canada, New Zealand, Australia, Singapore, and Malaysia. It is also observed that the VAT in UAE is the cheapest among rest of other countries are collecting.
VAT is charged at each step of the ‘supply chain’. Ultimate consumers generally bear the VAT cost while Businesses collect and account for the tax, in a way acting as a tax collector on behalf of the government.
A business pays the government the tax that it collects from the customers while it may also receive a refund from the government on the tax that it has paid to its suppliers. The net result is that tax receipts to government reflect the ‘value add’ throughout the supply chain. To explain how VAT works I have provided a simple, illustrative example below (based on a VAT rate of 5%):
Why VAT in UAE?
The UAE Federal and Emirate governments provide citizens and residents with many different public services – including hospitals, roads, public schools, parks, waste control, and police services. These services are paid for from the government budgets. VAT is a game changer with respect to a source of revenue, It will provide the country with a new source of income which will contribute to the continued provision of high-quality public services into the future. It will also help government move towards its vision of reducing dependence on oil and other hydrocarbons as a source of revenue.
VAT rate of five percent would generate additional revenue equivalent to about 1.5 percent of the UAE’s gross domestic product.
Considering that the UAE economy is forecast to grow to $440 billion in 2019, the VAT contribution would be approximately $6.5 billion, according to Alp Eke, senior economist at the National Bank of Abu Dhabi.
A business must register for VAT if their taxable supplies and imports exceed the mandatory registration threshold of AED 375,000.
Furthermore, a business may choose to register for VAT voluntarily if their supplies and imports are less than the mandatory registration threshold, but exceed the voluntary registration threshold of AED 187,500.
Similarly, a business may register voluntarily if their expenses exceed the voluntary registration threshold. This latter opportunity to register voluntarily is designed to enable start-up businesses with no turnover to register for VAT
What is a designated zone?
“The designated zones are special zones for VAT purposes, which are generally considered outside of the UAE in terms of value-added taxation. While VAT applies throughout the UAE, in the designated zones VAT generally does not apply. Only fenced free zones with special controls on goods and services going in and out could benefit from this status.
The Federal Tax Authority announced 20 designated zones which would be exempt from the recently-implemented five per cent VAT in the country, bringing a major relief and clarity for the companies operating in the free zones.
Any supply of goods within the notified designated zone or from one notified designated zone to another notified designated zone – subject to necessary controls and procedures being followed and conditions of providing the financial guarantee, etc., if required being met – shall not be subject to VAT
Below is the list of the designed zones:
1.Abu Dhabi: Free Trade Zone of Khalifa Port; Abu Dhabi Airport Free Zone; and Khalifa Industrial Zone
2.Dubai: Jebel Ali Free Zone (North-South); Dubai Cars and Automotive Zone (Ducamz); Dubai Textile City; Free Zone Area in Al Quoz; Free Zone Area in Al Qusais; Dubai Aviation City; and Dubai Airport Free Zone
3.Sharjah: Hamriyah Free Zone; Sharjah Airport International Free Zone
4.Ajman: Ajman Free Zone
5.Umm Al Quwain: Umm Al Quwain Free Trade Zone in Ahmed Bin Rashid Port; Umm Al Quwain Free Trade Zone on Sheikh Mohammed Bin Zayed Road
6.Ras Al Khaimah: RAK Free Trade Zone; RAK Maritime City Free Zone; RAK Airport Free Zone
7.Fujairah: Fujairah Free Zone; Fujairah Oil Industry Zone (FOIZ)