VAT Vs Income Tax ,Difference between VAT and Income TAX

What Is Income Tax?

An income tax is a tax imposed on individuals or entities that is taxpayers and it that varies with their respective income or profits which is called taxable income. Law refers  to income tax on business entities as companies tax or corporate tax. Partnerships generally are not taxed; rather, the partners are taxed on their share of partnership items. Tax may be imposed by both a country and subdivisions. Many countries exempt locally organized charitable organizations from tax. VAT Vs Income Tax ,Difference between VAT and Income TAX is discussed below.

Income tax generally is computed at a given range of tax slab on the taxable income. The tax rate may increase as taxable income increases referred to as graduated or progressive rates. Taxation rates may vary by type or characteristics of the taxpayer. Capital gains may be taxed at different rates than other income. Credits of various sorts may be allowed that reduce tax..

Taxable income of taxpayers resident in the jurisdiction is generally total income less income producing expenses and other deductions. Generally, only net gain from sale of property, including goods held for sale, is included in income. Income of a corporation’s shareholders usually includes distributions of profits from the corporation. Deductions typically include all income producing or business expenses including an allowance for recovery of costs of business assets. Many jurisdictions allow notional deductions for individuals, and may allow deduction of some personal expenses. Most jurisdictions either do not tax income earned outside the country or allow a credit for taxes paid to other countries on such income. Nonresidents are taxed only on certain types of income from sources within the country, with few exceptions.

Most jurisdictions require self-assessment of the tax and require payers of some types of income to withhold tax from those payments. Advance payments of tax by taxpayers may be required. Taxpayers not timely paying tax owed are generally subject to significant penalties, which may include jail for individuals or revocation of an entity’s legal existence.

Types Of Income Tax-VAT Vs Income Tax ,Difference between VAT and Income TAX

Individual Income Tax

Most individuals do not pay tax on all of their income. Rather, the government offers a series of deductions, including mortgage interest, a portion of medical and dental bills, education expenses and several others, which taxpayers subtract from their gross income to determine their taxable income. For example, if a taxpayer earns AED 100,000 in income and qualifies for AED20,000 in deductions, the Government only taxes the remaining AED80,000. Then, the agency applies credits to the taxes owed. To illustrate, if an individual owes AED20,000 in taxes but qualifies for AED4,500 in credits, he only owes AED15,500 in tax.

Business Income Taxes

Businesses also pay income on their earnings, and the government considers corporations, partnerships, self-employed contractors and small businesses to be businesses. These entities report their business income, and then deduct their operating and capital expenses. The difference is their taxable business income.

State Income Tax

Tax levied on income at the state level. State income taxes have their own set of deductions and credits that may be awarded for certain activities, such as contributing to a state-sponsored activities. Taxpayers who itemized deductions on their federal returns may deduct state taxes paid.

Most countries employ a progressive income tax system in which higher-income earners pay a higher tax rate compared to their lower-earning counterparts. Taxes are levied by states upon their citizens and corporations to fund public works and services. Payment of taxes at rates levied by the state is compulsory, and tax evasion, the deliberate failure to pay one’s full tax liabilities, is punishable by law.

What is a ‘Value-Added Tax – VAT’

A value-added tax (VAT) is a type of consumption tax that is placed on a product whenever value is added at a stage of production and at the point of retail sale.  The amount of VAT that the user pays is on the cost of the product, less any of the costs of materials used in the product that have already been taxed. VAT Vs Income Tax ,Difference between VAT and Income TAX is discussed below

VAT is levied on the gross margin at each point in the manufacturing-distribution-sales process of an item. The tax is assessed and collected at each stage, in contrast to sales tax that is only assessed and paid by the consumer at the very end of the supply chain.

Value-added taxation is based on a taxpayer’s consumption rather than his income. In contrast to a progressive income tax, which levies greater taxes on higher-level earners, VAT applies equally to every purchase..

VAT Working

The traders are eligible to deduct the amount of VAT on the purchase and the sales of goods. The difference between this input or output tax will then be paid to the government. Apart from the payment, the traders can also forward a request for the refund of VAT but this is possible only in certain situations. Not every individual is eligible for this. The business or the company will then act as a tax collector for the government. After the completion of the above-mentioned process, the government will collect all the amount of VAT from the trader that is calculated for every stage of the production and distribution. The equal amount of that money will then be paid to the final consumer.

For eg:

The VAT system is invoice-based and collected at several points throughout an item’s production, each time value is added and a sale is made. Every seller in the production chain charges a VAT tax to the buyer, which it then remits to the government. The amount of tax levied at each sale along the chain is based on the value added by the latest seller.

Why VAT?

Gulf countries have always been away from all types of taxes; however, import taxes are imposed on companies that import goods into UAE. In the past one year, the fall in the oil price had a great impact on the Gulf economies. It seems the gulf countries have lost more than $300 billion due to the fall in the oil prices. This was one ill effect of being reliant on one source of income. The government has now decided to diversify the economy away from oil and gas.

UAE government also provides services like hospitals, roads, public schools, parks, waste control, and police which are usually covered through Government budget. However, VAT will provide with a new source of income, which will help in continuing these services at high quality. VAT is one such source of income which will provide huge impetus to the governments revenue.

Advantage  Of VAT in UAE: 

VAT has been incorporated in all business transactions from January 1^st 2018.It will be a milestone for UAE as it will generate revenues for development of infrastructure and economic growth of the country. It is estimated that with the introduction of the new form of taxation “Value Added Tax” the economy may raise its annual revenues by Dh 12 billion in the first year of implementation of the VAT system. Gulf Cooperation Council (GCC) decided upon the implementation of VAT system as being one of the steps to diversify revenues due to the fall in oil prices. Tax reform was top priority in UAE succumb to the fall in oil prices and revenues. This fall in oil prices also affected real estate industry impacting the economic growth of the country. An indirect consumption tax regime like VAT is a natural progression of GCC government fiscal policy moving towards more effective and efficient tax systems in a competitive and integrated global economy.  VAT could help the government to improve business conditions and maintain its reputation of being business friendly.

Rate of Taxation:

Taxation rate in UAE will be 5% on all goods and services. Government has decided upon the marginal rate of 5% in the interest of the residents, as purchasing power of the consumer will not be hampered to an extent. Thus implementation of VAT will not have adverse effect on the people who are on the lower end of the spectrum.

However GCC has agreed on three VAT rates that will levied by the member states at the time computation of tax:

• Standard Rate
• Zero Rate
• Tax Exempt

Standard Rate

The rate of 5% will be applied on the all the business sectors.(does not hold good for zero rated and exempted goods).It is mandatory  that all  invoices feature tax value separately and then be added to the final bill value. All invoices must also display VAT registration number to enable buyer to claim VAT credit.

Zero Rated:

As the term suggests, the tax is computed at the zero rate. The tax column in the invoice of the sold good will be zero. Only the cost of the good will be charged.

In the contrary if tax has been paid for zero rated goods, tax credit of purchases can be availed for the sold good. You will need to record any zero-rated supplies in your VAT account and report them on your tax return.

Zero Rated Items:

• Exports outside GCC
• Food items as per GCC list
• Medicine and Medical Equipment as per GCC list
• Supply of sea, land and air means of transportation
• International and Intra GCC transport and services
• Charity organizations
• Gold, silver and platinum – 99% and more purity
• First supply after extraction of gold, silver and platinum
• Supply for educational purposes and related goods and services beneficial for educations
• Residential real estate – first supply

TAX Exempt:

The Tax Exempt supplies are not charged with VAT; however any tax paid earlier on purchases of the item is not available for credit.

As an example consider a taxi service (local passenger transport) that is tax exempt and will not collect any VAT from passengers. Though it will not collect any tax it will not be able to get credit for the tax they have paid for purchase of motor vehicles.

GCC: Tax Exempt List

• Imports of goods which are custom exempt
• Local passenger transport
• Bare Land

UAE: Additionally exempt

• Residential buildings other than zero rated
• Some specific financial services – margin based

 VAT Vs Income Tax ,Difference between VAT and Income TAX                                           

Being a resident of UAE or business entity it is mandatory to align business operations as per

the new taxation reform. There would be many questions and perceptions running in one’s mind. One of the important concerns would be will the business be affected if new prescribed rules and regulation regards to new taxation system are not adhered. Like filing returns on time, maintaining accounts of books ,generating invoices as per VAT mandate. A mentor preferably who can be there at all time to assist and answer all the queries relating to VAT. Reach VAT software is the perfect solution proving to be your best companion in the VAT transition period.