VAT Basics

A Comprehensive Guide to VAT Basics in the United Arab Emirates.

Understanding Value Added Tax

Tax can be defined as a fee charged by the government on goods, services, income and other transactions in order to finance public services and government expenditure. There are two major tax categories:

• Direct Tax: Paid directly to the government by the taxpayer.
• Indirect Tax: Paid to the government by an intermediary, who collects the tax from the taxpayer on behalf of the government.

The VAT is an indirect tax levied on the consumption or use of goods and services. It is charged at each step of the supply process. The end consumers bear the costs of VAT while registered businesses collect and account for VAT, acting as tax collectors on behalf of the government.

How does VAT work?

Let’s consider the following example to see how the VAT system works:

• A manufacturer who produces plasma television sets sells a TV to a wholesaler for AED 1000. Under the new tax system, the manufacturer collects a VAT of 5% (AED 50) from the wholesaler on behalf of the government. The wholesaler then pays a total amount of AED 1050.
• The wholesaler increases the selling price to AED 2000 and sells it to a retailer. The wholesaler collects a VAT of 5% (AED 100) from the retailer on behalf of the government, while also receiving a refund of the VAT paid to the manufacturer in the previous step. The retailer pays a total amount of AED 2100.
• The retailer further increases the selling price to AED 3000 and sells it to the end customer. The retailer collects a VAT of 5% (AED 150) from the end customer, while also receiving a refund of the VAT paid to the wholesaler in the previous step.
• The end customer pays a total amount of AED 3150 for the plasma TV set.

A value added tax is applied at every stage of the sales process, and the registered business receives a refund (or tax credit) on the VAT paid at the previous step. The Federal Tax Authority (FTA) has specified a fixed VAT rate of 5% for the sale of goods and services in the UAE.

Why is the VAT being introduced?

The UAE delivers excellent public services, including healthcare, education, public transportation, and social services. The introduction of a VAT will allow the government to diversify their sources of income and continue to ensure a good standard of living for UAE residents.

Registering for VAT

Registration may be mandatory or voluntary, depending on the business revenues generated.

Mandatory Registration

A business must register for VAT if the total value of their taxable sales and imports within the UAE exceeds the mandatory registration threshold of AED 375,000 for the previous 12 months or within the upcoming 30 days.

Voluntary Registration

A business can voluntarily register for VAT if the total value of their taxable sales and imports within the UAE exceeds the voluntary registration threshold of AED 187,500 for the previous 12 months or within the upcoming 30 days.

VAT Rates in UAE

The VAT rate is 5% for most goods and services. However, specific categories fall under 0% or Exempt status:

Need for bookkeeping

Every business owner registered under VAT must maintain records. A valid tax invoice must include the following information:

1. A unique sequential number.
2. The date of issue.
3. The supplier’s name, address and Tax Registration Number (TRN).
4. The customer’s name, address and Tax Registration Number (TRN).
5. Description of goods or services supplied.
6. Total amount excluding VAT.
7. Total VAT chargeable.
8. Price and quantity of each item.
9. Rate of discount per item.
10. Rate of VAT charged per item.
11. Total amount including VAT.