Getting started with VAT
By Kitaab
VAT has become integral to the operation of all firms in the UAE since it came into effect on January 1st 2018. VAT affects the overall operations of the firms in the UAE now and thus has a significant impact o the day-to-day functioning of businesses. VAT an indirect tax that was applied has to be dealt by businesses in 3 steps. As the first step, businesses must register their business for VAT, obtain a registration number and finally obtain a tax certificate.
The initial process of registration is to be done once and is pretty straightforward. However, the following stages of incorporating taxes into the everyday operations of a firm can be tricky.
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Learn moreWhy was VAT introduced?
VAT was introduced as part of diversifying income sources for the UAE and reducing dependence on income from oil alone. This was also one of the recommendations from the IMF to all the gulf countries. The income earned through VAT is supposed to finance various development projects across the country contributing to its further growth and progress while not being reliant on oil resources alone.
The process of VAT Collection
VAT is a goods and services tax that is levied on the consumers by the government indirectly through the businesses providing them. Thus businesses act as tax collectors who add VAT as a percentage to their regular prices of services and goods known as output VAT and then the businesses pay this collected VAT to the designated authority with relevant invoices. A Business itself might be the consumer of the goods and services provided by other businesses that are charged VAT, this amount also known as input VAT can be deducted from the total VAT to be paid by the business to the tax authority. The tax authority collecting VAT can be the Ministry of Economy or more specifically the recently established Federal Tax Authority.
VAT Registration Criteria
Registration for VAT by firms can fall into a mandatory or voluntary category depending on their turnover levels.
Mandatory registration for VAT is applicable to businesses with a turnover of over AED 375,000.
Voluntary Registration – Businesses with turnover lower than Dhs. 375,000 but above Dhs. 187,500 can choose to register for VAT voluntarily.
If a firm is not registered for VAT, it cannot charge VAT on its products and services and also cannot claim input VAT on its expenses of obtaining supplies.
VAT Rates in the UAE
There are three charge categories under the GCC framework for VAT-
These are standard, zero and exempt rates.
A standard VAT rate of 5% is applicable to most businesses in the majority of sectors. The billings amounts and tax value must be separately indicated in the invoices.
The Zero tax rates are applicable to specific operations such as healthcare, educational services, oil and natural gas, transportation, export outside GCC and investment in precious metals.
If a zero-tax rate is applicable, it is to be indicated in the tax column of invoices specifically as offsetting tax with tax applicable in a similar category is not possible.
Exempt supply refers to the VAT exemptions on the supply of goods and services pertaining to residential properties, public transport, life insurance and a few other financial services.
Filing Returns for VAT
VAT return documents a taxed entity’s VAT liability. The process of VAT return can be done on the e-service portal by the FTA and a comprehensive VAT return user’s handbook has also been made available on the FTA portal to aid businesses to file returns accurately and with ease. These returns are to be filed every quarter by VAT-registered businesses on this portal.