Value Added Tax or VAT is a tax on the consumption or use of goods and services levied at each point of sale. VAT is a form of indirect tax and is used in more than 180 countries around the world. The end-consumer ultimately bears the cost. Businesses collect and account for the tax on behalf of the government.

About VAT

Value Added Tax (VAT) was introduced in the UAE on 1 January 2018. The rate of VAT is 5 per cent. VAT will provide the UAE with a new source of income which will be continued to be utilised to provide high-quality public services. It will also help government move towards its vision of reducing dependence on oil and other hydrocarbons as a source of revenue.

Implication of VAT on individuals

VAT, as a general consumption tax, will apply to the majority of transactions in goods and services. A limited number of exemptions may be granted.

As a result, the cost of living is likely to increase slightly, but this will vary depending on an individual’s lifestyle and spending behaviour. If an individual spends mainly on those things which are relieved from VAT, he is unlikely to see any significant increase.

The government will include rules that require businesses to be clear about how much VAT an individual is required to pay for each transaction. Based on this information, individuals can decide whether to buy something.

Implication of VAT on businesses

Businesses will be responsible for carefully documenting their business income, costs and associated VAT charges.

Registered businesses and traders will charge VAT to all of their customers at the prevailing rate and incur VAT on goods/services that they buy from suppliers. The difference between these sums is reclaimed or paid to the government.

VAT-registered businesses generally:

• must charge VAT on taxable goods or services they supply
• may reclaim any VAT they have paid on business-related goods or services
• keep a range of business records which will allow the government to check that they have got things right.

VAT-registered businesses must report the amount of VAT they have charged and the amount of VAT they have paid to the government on a regular basis. It will be a formal submission and reporting will be done online.

If they have charged more VAT than they have paid, they have to pay the difference to the government. If they have paid more VAT than they have charged, they can reclaim the difference.

VAT in GCC

The UAE coordinates VAT implementation with other GCC countries because she is connected with them through ‘The Economic Agreement between the GCC States’ and ‘The GCC Customs Union’.

Criteria for registering for VAT

A business must register for VAT if its taxable supplies and imports exceeds AED 375,000 per annum.

It is optional for businesses whose supplies and imports exceed AED 187,500 per annum.

A business house pays the government the tax that it collects from the customers, but at the same time it receives a refund from the government on tax that it has paid to its suppliers.

Foreign businesses may also recover the VAT they incur when visiting the UAE.