What is VAT? How does it work?

What is VAT? How does it work? 

Value added tax (VAT) is a tax that is applied to all the goods and services that are produced by the eligible VAT companies and are consumed by the people. That is why it can be said that VAT is a consumption tax. There is a difference between VAT and other sales tax. Although for some people both taxes work in the same way. However, there is a slight difference between the working of two. The sales tax is applied only at the last stage of the production of a product. VAT, on the other hand, is applied at each and every stage of the production which is why it is also known as a multi-stage tax. The VAT is applied to the value that is added during the production process.

• Collect the value added tax (VAT) on the sales they are doing. This will be called output tax.
• Recover the amount of VAT that is paid on the purchase of goods which will be the input tax

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: What is VAT? How does it work? 

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 Working- What is VAT? How does it work? 

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:

ELIGIBILTY

If the Annual Turnover of the company is more than AED 375,000/, it is mandatory for the company to register under UAE VAT before the end of the year 2017. If the Annual Turnover is between AED 187,500 & AED 375,000/, it is optional for the company to be registered under UAE VAT law. Further, if it is less than AED 187,500/, the company need not register under this law.

VAT REGISTRATION

Businesses can register for VAT tax through the e-services section on the FTA website. However, they need to create an account first. All businesses must submit an application to register for VAT as soon as possible to avoid the risk of missing the deadline that is 1 January 2018. Those who fail to apply for VAT would be liable to fine/s as per the Administrative Penalties stipulated in Cabinet Decision No. 40 of 2017 on Administrative Penalties for Violations of Tax Laws in the UAE.

ONLINE PROCEDURE FOR VAT REGISTRATION

1. Visit the official website of the Ministry of Finance
2. Click the option of VAT certificate to reach the page
3. Follow the option of Start Service by clicking it
4. Complete the registration process and create your unique login id and password
5. Now you can login and reach the customer landing page
6. Click the option for “create a new tax request”
7. Fill up the required details
8. After submitting you will be directed to the payment gateway
9. Pay the online fees for VAT registration.

After payment an acknowledgement or confirmation receipt will be generated.

VAT Returns:

UAE taxpayers should file VAT returns with the Federal Tax Authority (FTA) on a quarterly basis. Returns must be filed according to the procedures specified in the VAT legislation, within 28 days from the end of the tax period. Taxpayers can file their returns online using e-services. A VAT return is generally paid four times a year and in some cases monthly. Timely submission of the e- returns keeps the company ingood books with the tax authorities. Even if you have not paid VAT, a nil return needs to be submitted if you are a VAT registered company.

• The return will include only summary data of purchases and sales, Input & Output tax and which Emirate the sale has been done.
• Returns will be quarterly and must be filed and tax paid within 28 days of quarter end.
• All returns and tax payment will be fully electronic.

CONCLUSION

VAT will be introduced in the UAE, along with other Gulf countries, from the beginning of 2018 at 5 per cent. The government is likely to use its ability to either zero-rate or exempt many supplies most likely to impact the common man to ensure that the impact of VAT is kept to a minimum. Essentially, the intentions of most governments when introducing a VAT is to focus more on taxing discretionary spend by consumers, while ensuring that those at the lower end of the spectrum are protected and assisted.

Answer to all your queries: What is VAT? How does it work? 

With the introduction of VAT in UAE there is the probability of unstability in business operation for a period of time. We at Reach will provide you with best software supports for a smooth run of business operations.