The year 2018 saw a drastic change in the Taxation laws in the UAE. Over 150 countries have enforced VAT to increase revenue, while the UAE did the same to raise its revenue. Value Added Tax came into force on 1st January 2018. The VAT rate is 5%, which is imposed upon the supplied goods and services.
In different parts, VAT is an indirect tax known as a Consumption Tax or Good and Services Tax (GST). Value Added Tax in UAE is charged at each level of the supply chain while the end consumer has to face the VAT’s burden. On the other hand, companies act as agents to collect and account for taxes on the government’s behalf.
While the first day of the VAT amendment was chaotic, people and businesses now understand how it functions.
Why is the UAE bringing in VAT?
In the last three years, low oil prices have put enormous economic pressure on the Gulf Cooperation Council (GCC) countries. This has resulted in a need to diversify revenue streams. Therefore, to raise non-oil revenue, the Ministry of Finance (MoF) decided to introduce VAT. The 5 Gulf States, coupled with the UAE, decided to bring in VAT as one of the efforts to diversify revenues and increase the government income.
Businesses need to know a few things to ensure compliance and implement best practices in their organizations. Here is a rundown of what you probably didn’t know about VAT in UAE.
Interesting facts about VAT UAE
- Price hikes could land you in trouble. Reports started to come in January that many companies were increasing the prices of their products and services. For instance, some retailers raised the costs of their goods by 5%, besides the 5% VAT. Your business should have a sound pricing structure that makes sense to the customer. Increasing the prices of your products without explanation can cause you to lose customers and may even land you in trouble.
- Your business can get VAT exemptions. This is essential information for those that want to set up their business in UAE. There are three VAT categories; standard, zero-rate and exempts. Firms registered as zero-rated can reclaim their VAT contribution for their products and services. Exempt companies are either not registered or cannot reclaim the contribution. If you plan to start a free zone business, please note that you will be liable to pay VAT on purchasing goods and services from outside the free zone.
- VAT on the hospitality and entertainment sector is non-recoverable. Article 53 can be confusing for many, so getting clarification on what is considered a business expense and what is entertainment is standard. VAT incurred on actual business expenses, such as food and beverages provided at a business meeting, is recoverable. However, if entertainment or hospitality is the aim of a forum, event or gathering, VAT is non-recoverable
- Second-hand products subject to VAT can be subject to a profit margin scheme.As per the Federal Tax Authority, second-hand goods previously subjected to VAT can be regarded eligible goods under the profit margin scheme. VAT applies to the total sales price of all goods bought before VAT implementation.Firms that deal in second-hand products should be careful when recording the eligible and non-eligible items sales, as it can impact their accounts books. Items should be divided based on eligibility to remove errors when filing for VAT recovery.
- Maintain accounts and records for a minimum of 5 years. According to the law, you must keep accounting and bookkeeping records for five years after the end of the tax period. So if a tax invoice is generated on 15th January 2018, it belongs to the period Jan – Dec 2018. This means the invoice should be kept till 31st December 2023. Records for capital assets should be kept for ten years, while records for real estate should be maintained for 15 years minimum from the end of the tax period.
- VAT to remain the same. When it was announced that VAT would be introduced at 5% from 2018 onwards, many businesses and consumers feared the rate would surge over time. Despite such fears, the UAE government has no plan to increase the VAT. While companies can reclaim VAT, their primary concern is how it affects the consumer’s buying power. With the VAT remaining constant, enterprises, especially in the service industry, can keep their prices competitive and aid consumer retention.
- Tourists can get a VAT refund. Starting Q4 of 2018, tourists can get a VAT refund on purchases from retailers, provided that the products they buy are not tax-exempt. This is an excellent move by the government as the tourism industry is one of the most significant contributors to the economy.
- One benefit of this move is an increase in government revenues. It will further assist in increasing individual well-being and promote joint stability. The government is said to utilize the revenue generated from VAT collection on developmental projects.
UAE is a developed economy. The nation also plans to implement excise tariffs of 100% on tobacco and energy drinks and 50% on sugary drinks. Analyzing the current strategy in Gulf nations, the introduction of VAT is very crucial. Globally, many countries put the idea of VAT into practice years ago; therefore, UAE must join the line for a better future. This positive move will slightly impact the day-to-day lives of middle-class families, but in the long run, the results will be fruitful.