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Effects of VAT in UAE


The year 2018 not only marks the beginning of a new year but a new era in the history of United Arab Emirates Economy as VAT takes effect. VAT is introduced at a rate of 5% implementing in UAE from January 1, 2018. However other GCC countries may start at the same time or at the latest of January 1, 2019.

So what is this new concept of value added tax that is so much talked about in UAE these days? Why is this causing so many apprehensions in the mind of stakeholders? In this article we will explain you in detail about its definition, implementation, and effects on UAE taxation system as well as on overall economy.

The fact is that UAE is new to this form of taxation as VAT is one of the most common types of tax which has been in effect in over more than 150 nations. Most of the expatriates may be aware of this form as they pay that in their home countries. However this new change has caused discomfort and confusion in the minds of consumers and businesses alike.

What is VAT?

Value added tax (VAT) is one of the most common types of consumption tax that is charged on value added to the goods and services along each step in the production or delivery of good or service. The ultimate VAT cost has to be borne by final consumers while businesses play the role of tax collector on behalf on government as they collect and account for it.

Why is VAT implemented?

VAT is levied in order to increase revenues for governments in the Gulf Cooperation Council (GCC). The decision to diversify income resources primarily came due to the developments that were negatively affecting the government such as reduction of income from oil revenues as a result of sharp decline in oil prices.

Potential Advantages of VAT:

  • Ideally, VAT will trigger a strong incentive for people to earn more meanwhile encouraging customers to start savings and prevent excessive or unnecessary spending.
  • VAT will serve as an addition source of revenue so it will be used by UAE and other GCC nations for public welfare projects.
  • More than Dh12 billion revenues in the first year are anticipated to be generated as a result of VAT implementation.
  • The revenues collected will be consistent because the consumption of basic commodity products and services will continue.

Items Charged and Items Exempted from VAT:

  • VAT will be charged on electronics, smart phones, cars, jewelry, watches, eating out, and entertainment. It is also expected that GCC countries will introduce excise duties on certain beverages that are considered as destructive for health, including those with high sugar content.
  • A list of 100 food items, health, education, bicycles, and social services are exempted from Value Added Tax.

Even after the implementation of VAT, UAE is still tax free in many ways as there is no tax on salaries. There are various free zones across UAE which are tax free and offer 100% foreign ownership as well as ease of doing business. The government is putting its considerable efforts to put the effects of VAT on common man to a minimum.

Impact of VAT on UAE Business:

Businesses will serve as tax collection agent. It is vital for them to understand their part in terms of registration and compliance as UAE government has reserved its right to penalize from a minimum of AED 500 to as much as 5 times overdue VAT amount. So in terms of registration,

  • Companies in UAE that have annual turnover of AED 375,000 will be obliged to register under VAT system.
  • Companies that have annual turnover between AED 187,500 and AED 375,000 also have an option to register voluntarily in order to avail VAT’s advantages.
  • Eventually, it will be compulsory for all businesses to be registered under this system when it will go into next phase, regardless of the reported revenues.

Registration for VAT system is the first step for businesses. The next phase is another crucial procedure that is keeping of records, keeping up book of accounts using VAT compliance accounting software, lodgment of VAT returns after every 3 months and how this new law affects the pricing of goods and services given to customers.

How can KWSME help?

Being one of the leading consultant agencies of UAE, We at KWS urge you to get your business solutions from us. We do all the paperwork and legal procedures that can save a lot for your company. Our team at KWS is expert in developing business models and performing all the company formation work for your business in UAE.

With the new VAT system being implemented on all businesses, we will guide you through each stage from implementation to operation so that you can understand and exercise the benefits of this new system. Also please note that there are further regulations which will be issued by Federal Tax Authority which will guide businesses for VAT administration. We will continue to update you for further news as well as give our expert advice on all your possible queries.

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