Zero Rated vs. Exempted VAT Supplies in UAE: A Complete Guide
Updated on: Nov 21st, 2024
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17 min read
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Value Added Tax (VAT) is an indirect tax levied by the government on the supply/consumption of goods and services. The government of UAE implemented VAT to diversify its income streams and reduce its dependency on oil revenues.
While the standard VAT rate in the UAE is 5%, multiple items are Zero-rated and Exempt. So, we created this guide that should answer most of your questions regarding the following:
- What is zero-rated VAT in UAE?
- What is exempted VAT in UAE?
- What is the difference between Zero-rated vs Exempt Supplies?
What are Zero-Rated VAT Supplies in UAE?
If you charge VAT for supplies at 0%, then it means that the goods are still VAT taxable, but the VAT rate is 0%. So, like the standard 5% goods, you will still need to record any zero-rated goods/services and file returns for them.
You should register for VAT if:
- Your taxable turnover is > 375,000 AED in a year
Or,
- If you expect your turnover to exceed 375,000 AED in the next 30 days
However, there is an exception for zero-rated supplies. If you only deal with or produce zero-rated goods/services, you can apply for an exemption from VAT registration. If you get the exemption, you won’t be required to submit regular tax returns and won’t be able to recover input tax on inward supplies.
The following goods/services can be registered for Zero-rated VAT in UAE:
- Export of goods/services outside the GCC.
- International transportation services for goods and passengers.
- Certain means of transport, such as trains, vessels, airplanes, etc.
- Precious metals like silver, gold, platinum, etc., with at least 99% purity.
- First supply of residential buildings (lease/sale) within three years of construction.
- Charity-related buildings
- Educational services from recognized government-funded institutions and the supply of all related goods and services.
- Curative and preventive healthcare services, including specific medical equipment and medicines
Exempted VAT Supplies in UAE Explained
Exempt supplies refer to goods/services that are not subject to VAT, meaning no tax is levied on their sale or purchase. Some common examples of exempted supplies under UAE VAT law include:
- Financial services (where an explicit fee is not charged, e.g., interest on loans)
- Residential property rentals (excluding commercial properties)
- Local passenger transport (such as buses and taxis)
- Bare land (undeveloped land sold without any structures)
Businesses dealing only in exempt supplies dont need to register for VAT.
A key point to note is that businesses dealing exclusively in exempt supplies cannot reclaim the input tax (VAT paid on purchases) associated with these supplies. This differs from other VAT categories, where businesses can generally recover VAT incurred on business-related expenses. This restriction can impact profitability, as companies will effectively bear the cost of VAT on goods and services purchased for their exempt activities.
Zero-Rated vs. Exempt Supplies: Key Differences
Zero-rated and exempt supplies might both have a VAT rate of 0%, but their treatment of input tax recovery and business implications are way different. The following table highlights these key differences:
Aspect | Zero-Rated Supplies | Exempt Supplies |
VAT Rate | 0% | 0% |
Input Tax Recovery Possible? | Yes | No |
Impact on Businesses | Encourages businesses to maintain healthy cash flow by allowing input tax recovery. | Increases operational costs as VAT on expenses cannot be reclaimed. |
VAT Filing Obligations | Required to file regular VAT returns and report zero-rated supplies. | Required to file VAT returns, but exempt supplies are reported separately from taxable supplies. |
Eligibility for VAT Registration | Mandatory if the business exceeds the VAT threshold of AED 375,000. | Businesses dealing only in exempt supplies are not required to register for VAT. |
Effect on Pricing | Prices remain competitive as businesses can recover input VAT. | Businesses may have to increase prices to account for non-recoverable input VAT costs. |
Mixed Supplies | Businesses dealing in both zero-rated and standard-rated supplies can reclaim input tax proportionally. | Businesses dealing both exempt and standard-rated supplies can only reclaim input tax on the standard-rated portion. |
Compliance Burden | More complex as businesses need to track and claim input VAT on relevant expenses. | Simpler compliance as businesses don’t need to manage input VAT recovery, but the inability to reclaim VAT may increase costs. |
Standard VAT Rates in UAE
The UAE VAT system mainly relies on three main tiers: 5%, 0%, and VAT exempt. The major classification based on industry is shown in the table below:
| Category | VAT Rate | Classification |
| General goods and services | 5% | Standard Rate |
| Healthcare (curative/preventive) | 0% | Zero-Rated |
| Healthcare (non-essential services) | 5% | Standard Rate |
| Education (recognized institutions) | 0% | Zero-Rated |
| Education (non-recognized institutions) | 5% | Standard Rate |
| Export of goods and services | 0% | Zero-Rated |
| First sale of residential properties | 0% | Zero-Rated |
| Residential rentals | 0% | Exempt |
| Local passenger transport | 0% | Exempt |
| Oil and gas industry | 5% | Standard Rate |
| Commercial properties | 5% | Standard Rate |
| Precious metals (99% purity) | 0% | Zero-Rated |
Conclusion
Understanding the minute yet important technical differences between terms is very important in business, as they directly affect:
- Your ability to reclaim input VAT
- Influence pricing strategies
- Impact on overall profitability.
Misclassification or lack of understanding can lead to penalties of up to AED 20,000. That’s why staying informed on these technicalities helps with day-to-day VAT obligations and positions your business for long-term success.
Frequently Asked Questions
