Value Added Tax (VAT) was introduced in UAE on 1st January 2018. The Federal Tax Authority (FTA) is chargeable for all administrative and collection of taxes in the UAE.
UAE imposes VAT on tax registered businesses on a taxable supply of goods or services at each step of the supply chain. The introduction of VAT in UAE had result in an increase in the revenue for the government. Also, VAT in UAE will make the business and the customers more responsible for understanding their responsibility towards the payment of taxes and the prosperity of the economy and the country.
There are two types of Supplies in the UAE VAT, such as:
- Exempted Supplies and Taxable Supplies.
- Taxable Supplies has been further classified to zero rated and standard/full rated.
1. Zero-Rated Supplies are those supplies on which the rate of VAT is 0%. But in zero rated supplies input tax can be deducted.
Following are the common Zero Rated Supplies under the UAE VAT.
2. Standard Rated Apply
A taxable supply at the standard rate is a supply on which VAT is charged at 5% and We can claim VAT input to the Federal Tax Authority for Standard Rated supplies.
3. Exempt Supply
Exempt Supplies are those kinds of supplies which are unaffected by VAT implementation in the UAE. Tax amount is not charged on such supplies. Hence, the input tax in the exempt supply cannot be recovered
Following are the common Exempt Supplies under the UAE VAT.
According to the UAE VAT Law, designated zones shall be treated as outside the UAE and no VAT will be applicable. As the result, the supply of goods from the Designated Zone to the supplier located in the mainland (inside the UAE State) will be considered as import. The supplier who is buying goods from the Designated Zone will have to pay VAT on a reverse charge basis, similar to import of goods from other countries.
If it satisfies the following conditions.
- It is fenced geographic area which has custom control to control the entry and exit for the movement of goods.
- It will have internal process for storing and keeping the goods.
Some rules for designated zone companies
- Supply of goods made within the designated zones will be considered out of the scope of UAE VAT Law as long as goods are not consumed or altered during the transfer.
- Supply of services in the designated zones will be considered as supply in the mainland and will be subject to 5% VAT.
Reverse Charge Mechanism in UAE
Reverse Charge Mechanism is applicable to the registered person on the import of goods and services in UAE. Under the reverse charge mechanism, the recipient is responsible for the payment of tax and reporting in the VAT return. The supplier will not responsible to pay VAT.
VAT Registration in UAE
A business must register for VAT if the taxable supplies and imports exceed the mandatory registration threshold of AED 375,000. Furthermore, a business may choose to register for VAT voluntarily where the total value of its taxable supplies and imports (or taxable expenses) is in excess of the voluntary registration threshold of AED 187,500.
If the taxable person fails to register the business within the time limit, then he will be liable to pay the late registration penalty of AED 20,000/- as per the Law.
VAT Return in UAE
The taxable person must file VAT Return on a regular basis that is on or before 28th of the end of the tax period. VAT Return in UAE can be filed either quarterly or on a monthly basis based on the annual turnover of the company.
The last date to file VAT returns, for quarterly VAT returns, due date will be 28th of the subsequent month following the end of the quarter.
For the monthly return, the last date to file VAT return will be 28th of the subsequent month. For example, for the return period of January 2018, the last date will be 28th February, 2018.
If the taxable person fails to file the VAT return within the due date, then he will be liable to pay administrative penalties as per the cabinet Resolution No. 40 0f 2017 on Administrative penalties for violation of Tax Laws in the UAE.
VAT Compliance and responsibilities as a VAT Registrant?
Every entity should maintain proper books of accounts to record all the financial transactions. Based on the recorded revenue the company can get registered for VAT once it reaches the VAT Registration threshold. Further, the books of accounts and records must be kept for 5 years.
1. VAT Compliance Requires Clean Data
All the businesses registered for VAT Should ensure entering of proper data in sales and accounting system. & must ensure that their accounting system is capable of generating reports, documents and returns, further VAT relevant data concern the minimum content of invoices as provided by law.
2. Outgoing Invoices
The VAT Registered business must have to charge VAT for all relevant standard-rated supplies at applicable rates and must also ensure that it is supported by proper supporting documents.
3. Correct Posting of Incoming Invoices
Every registered business has the right to claim the input credit for the VAT that is paid to their supplier. A taxable person is able to recover input tax in the first tax period in which it has received and retained a tax invoice or other documentation evidencing the supply or import. Also, make sure that no input credit on entertainment-related expenses and motor vehicle-related expenses are properly treated.
4. VAT refund
If the taxable person has excess input VAT, then they can claim the excess amount from the authority. The excess Input can also be used to set off the future payable VAT. After submitting the VAT Returns, VAT Refund Form 311 can be submitted in the FTA portal.
In addition to this, the FTA has also introduced Tourist Refund Scheme for the foreigners who visit UAE and has purchased any goods during their stay in UAE subject to certain conditions.
5. Filing VAT returns
VAT Returns Form 211 must be submitted with proper care and attention. If there is any error or failure while disclosing any transaction that has led to a decrease in output VAT, then Voluntary Disclosure Form (VDF) must be submitted in order to correct such error. However, submitting VDF is compulsory only in case the output VAT is more than AED 10,000. If less than, then such transaction can be disclosed in the subsequent return.
The treatment and taxability with regard to VAT in UAE should not be considered as easy. The VAT Compliance will become easy if you have a proper knowledge of the provisions of the Law and its applicability. The best way to ensure VAT compliance is to have support from a VAT Consultant or TAX Agent in UAE.