Tax is a compulsory contribution by individuals and corporate to government based on predefined rules.
There are mainly two types of taxes :
- A direct
- Indirect tax
Value Added Tax (VAT) is an indirect tax. It is a type of general consumption tax that is collected incrementally, based on the value added, at each stage of production or distribution/sales. It is usually implemented as a destination-based tax. It is also known as goods and services tax (GST) in some countries.
|Basis for Comparison||Sales Tax||VAT|
|Meaning||Tax charged on the total value of the commodity, when the sale takes place is known as Sales Tax.||VAT is a tax charged at each level of the production and distribution chain whenever the value is added to the product.|
|Nature||Single point tax||Multi point tax|
|Evasion||Can be possible||Cannot be possible|
Many countries prefer VAT over sales taxes for a variety of reasons. One of the main reasons is that VAT is considered as a more sophisticated approach to taxation in addition businessmen acts as tax collectors on behalf of the government and thereby generates good revenue for the government. Further VAT significantly reduces tax evasion.
The proposed rate of VAT in the UAE will be up to 5%.
The significance is that each VAT registered business entity becomes automatically the agent of the government to collect from customers and pay it back to the Government Authority. VAT is charged at each stage of the ‘supply chain’. Ultimate consumers generally bear the VAT cost. The Businesses act as tax collector for the government authorities. The difference between the VAT charged on customers and the VAT paid to suppliers will be either paid to or reclaimed from the government.
The expenses of these services are borne by the government from its public funds which are earmarked in the budgets. VAT will provide a new source of non oil revenue for the Emirates which will increase the revenue towards the Government exchequer.
The will help the Government for providing better and high-quality public services in the future thereby enhancing the living standard of the public. VAT will also result in the increase in the government non oil revenue which is estimated to be around 2% of the GDP.
The Federal Government has tentatively decided to introduce VAT in the UAE by 01 January 2018
VAT, as a general consumption tax, will apply to the majority of transactions in goods and services. Some specific items like the sale of bare land, local transport etc. are exempted from VAT.
As per information available from the official site of the Ministry of Finance, UAE, registration for VAT will be opened to the business entities in the third quarter of the year 2017. Business entities will have the option to use online registration service.
As per the official site of Ministry of Finance, UAE, majority of the business entities will be required to file the VAT returns on quarterly basis, within one month/28 days from the end of the respective quarter.
Every business unit in the UAE should get prepared well in advance before the due date of VAT implementation:
- Check whether they come under the mandatory VATregistration category or not.
- For complying with the VATrequirements, every organization has to make necessary changes to their existing financial management and accounting system, accounting software, and sometimes even to their core operation style.
- Human resource training will be necessary to update and upgrade the staff to equip themselves to the new UAE VAT regulatory requirements.
As per the information available from media, the UAE government is not considering of introducing personal income tax in the country.
- VATimplementation will strengthen UAE’s economy. It is expected to contribute around 2% of the GDP of the country in the first year of implementation.
- It is a bold move on the part of the authorities of the country and will bring about a paradigm shift in the revenue stream of the country i.e. from oil sourced revenue to non oil sourced revenue.
- It will be additional revenue for the government to meet its future social service requirements.
- Inflation in the country may go marginally up.
The total VAT amount charged by the business entity from its customers (output VAT) are to be reconciled with the total VAT amount paid/payable by it, to the suppliers on a periodical basis. The excess amount charged over the paid/payable amount is the VAT liability for the business entity and are to be paid to the government within stipulated time; one month from the end of the quarter.
From the information, available from the ministry of finance, bare land, local transport, sale of residential property (second sales onwards), residential lease rent etc. are exempted from VAT in the UAE.
Yes, it will be applicable in service sectors as well.
In the case of exports, VAT will be zero rated.
The registered entities who are eligible to get VAT refund (When input VAT is more than output VAT) can submit the VAT returns to the authority by disclosing the same.