How Does VAT Work in UAE?

Value Added Tax (VAT) has become an important aspect of the economic landscape in the United Arab Emirates (UAE) since its implementation in the year 2018. Understanding how VAT operates in the UAE is vital for businesses, consumers and anyone involved in the country’s economic sector. It provides a stable source of revenue for the government and promotes fiscal responsibility.

What is VAT?

Value Added Tax or VAT in UAE is a consumption tax imposed on goods and services at every stage of production and distribution. It’s a transaction-based tax, which is levied on the value added to a product or service at each stage of its supply chain. The end consumer is the one who ultimately bears the burden of VAT, as it’s included in the final price of goods or services.

Why is the VAT introduced in UAE?

The UAE government provides diverse public services that include education, healthcare, social services and public transportation. The introduction of Value Added Tax in UAE allows the government to diversify the income sources, strengthen fiscal sustainability, align with global standards, encourage economic stability, and foster responsible consumption.

How the VAT Works?

The below mentioned example explains how the UAE Value Added Tax works:

1. The manufacturer sells the raw beans and charges 5% on the sale price (0.50 AED) as output tax (VAT) to the distributor. As the manufacturer has not incurred any input tax on his purchases, he has a net VAT payable to the tax authority or 0.50 AED (0.50 AED output VAT – 0 AED input VAT=0.50 AED payable)
2. The distributor has incurred input tax of 0.50 AED on his purchase from the manufacturer, and charges 5 %( 0.75 AED) on his selling prices as output tax to the coffee shop. The distributor therefore has a net VAT payable of 0.25 AED (0.75 AED output tax-0.50 AED input tax amounting to 0.25 AED payable to the tax authorities. 
3. The coffee shop has incurred input tax of 0.75 AED on his purchase from the distributor, and charges 5 %( 1.00 AED) on his selling price as output tax to the final consumer. The coffee shop therefore has net VAT payable of 0.25 AED (1.00AED output VAT-0.75 AED input VAT amounting to 0.25 AED payable to the tax authorities. 
4. The final consumer bears the full burden of the tax paid to the tax authorities, 1.00 AED. 

VAT Registration 

Your business must register for UAE Value Added Tax if it is registered in the UAE and your annual turnover exceeds AED 375,000. Moreover, businesses in UAE can voluntarily do registration if the total value of supplies and imports or expenditures in a year exceeds AED 187,500. Businesses in UAE can complete the VAT registration process through the FTA’s website.

 Who should register under VAT? 

Only those businesses crossing the defined annual aggregate turnover threshold are liable to register under UAE Value Added Tax. Based on the registration threshold, a business will either be mandated to register or as an option, a business can apply for registration or can seek exemption from VAT registration.

VAT registration in UAE can be classified into the following:

1.Mandatory VAT Registration

2.Voluntary VAT Registration

3.Exemption from VAT Registration

The Effect of VAT on individuals and businesses in UAE

The introduction of VAT has significant impact on both individuals and businesses in the UAE. Here’s how:

VAT on individuals

VAT is applied to diverse goods and services that include everyday necessities and optional purchases. As a result of this, individuals may experience a slight increase in the cost of living, as prices for taxable items increase to account for the VAT component.

VAT on businesses

The introduction of Value Added Tax (VAT) in the United Arab Emirates (UAE) has major implications for businesses across various sectors. It ensures proper compliance, manage financial implications, and adapt to the changing business environment. Effective VAT management can help businesses improve financial performance, and navigate regulatory requirements successfully.

Conclusion

In conclusion, the introduction of VAT in the UAE by the government reflects a strategic effort to diversify revenue sources and foster promote economic productivity. While UAE Value Added Tax implementation may present challenges in the initial stage, it represents a significant step towards building a more resilient and prosperous economy for the future of the nation.