The year 2018 marked the beginning of a new era in the UAE economy as VAT took effect. Value added tax (VAT) was introduced at a rate of 5% in the UAE from 1st January 2018. The good news is that the VAT rate is still the same at 5% in 2024.
What was the concept of VAT that was so much talked about in the UAE those days? Why is VAT still causing apprehensions in the mind of stakeholders? In this article, we explain its definition, implementation, and effects on the UAE taxation system and economy.
Back in 2018, the United Arab Emirates was new to this form of taxation. As one of the most common corporate taxes, VAT was in use in 175 nations by June 2023. Most of the expatriates are aware of VAT as they pay that in their home countries. However, this taxation change caused discomfort and confusion in the minds of consumers and businesses alike on its introduction.
What is VAT?
Value-added tax (VAT) is an indirect tax calculated at each stage of the supply chain from production to sales. It is one of the most common types of consumption tax that is assessed on value added to the goods/services. The consumers the ultimate cost of the final VAT. 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 the government. Primarily, the decision to diversify income resources with VAT came due to the developments that were negatively affecting the UAE. For example, reduction of income from petroleum revenues as a result of sharp decline in oil prices. Other countries in the Gulf Cooperation Council (GCC) cam onboard for VAT due to the same reason.
Further reading: Impact of VAT tax-rules on your business in the UAE
What are the advantages of VAT?
Here are the potential benefits of VAT through 2024.
- Ideally, VAT triggers a strong incentive for businesses to earn more.
- Meanwhile, it encourages customers to start savings and prevent excessive or unnecessary spending.
- UAE and other GCC nations are using VAT as an additional source of revenue, to run public welfare projects.
- VAT revenue collection was up from 12 billion AED in 2018 to 95.4 billion AED in 2022.
- The revenues from VAT will keep boosting due to the increasing consumption of basic commodity products and services.
Which items are charged and exempted from VAT?
- The VAT is applicable on electronics, smart phones, cars, jewelry, watches, eating out, and entertainment.
- Also, the GCC countries are applying VAT and excise duties on beverages that contain high-sugar or are harmful for health.
- A list of 100 food items including health, education, bicycles, and social services are exempted from VAT.
Even after the implementation of VAT, UAE is still tax-free in many ways as there is no tax on salaries. Various free zones across UAE 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.
What is the impact of VAT on the businesses in UAE?
Businesses are serving as tax collection agent for VAT. It is vital for them to understand their part in terms of registration and compliance. UAE government has can penalize from a minimum of AED 500 to as much as 5 times overdue VAT amount. So in terms of registration, companies have to keep in mind these points during 2024.
- Companies in the UAE that have annual turnover of AED 375,000 have to register under VAT system.
- Businesses that have annual turnover between AED 187,500 and AED 375,000 can 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 keeping of records, and keeping up book of accounts using VAT compliance accounting software. Lodgment of VAT returns after every 3 months verifies the number of goods and services given to customers.
With the new VAT system applying on many businesses, it’s important to know each stage from implementation to operation. This way you can understand and exercise the benefits of this new VAT system. Also, note that Federal Tax Authority will issue further regulations which will guide businesses for VAT administration.
As the leading consultant agency of UAE, we at KWS urge you to get your business advisory 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 employing all business models.
We go all out in performing all the company formation work for your business in the UAE. We will continue to update you for further news as well as give our expert advice on all your possible queries. Connect with us on get help in your tax registration and compliance.
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