VAT in UAE: A Comprehensive Guide for 2024

Federal Tax Authority (FTA) issued Federal Decree-Law No. 8 of 2017 to implement Value Added Tax in United Arab Emirates (UAE). VAT in UAE has been implemented w.e.f 1st January 2018.

This article explains the basics of VAT, including VAT rate, registration, input tax, VAT returns, penalties and many more.

What is VAT in UAE?

VAT is an indirect tax imposed on the supply of goods and services and is charged at each stage of the supply chain. The end-consumer bears the VAT while registered taxpayers collects the tax on behalf of the government.

Why is the VAT introduced in UAE?

The UAE government already delivers excellent public services, including education, healthcare, social services, public transportation, etc. The VAT introduction allows the government to diversify the income sources. Further, this huge revenue source ensures continuing the good standard of living in the UAE.

What is the VAT rate in UAE?

FTA announced a standard VAT rate of 5%. However, the FTA categorised a few goods and services under zero-rated supply and exempt supplies where no tax is charged.

How does VAT in UAE work?

The below example explain how the VAT system in the UAE works:

A manufacturer who produces a mobile phone and sells it to a wholesaler. Then, the wholesaler adds up the profit and sells the same to a retailer. Finally, the retailer increases the selling price to add the profit and sells it to the end consumer. It is to be noted that FTA charges a VAT rate of 5% on selling goods and services in the UAE.

Let's take a few numbers to understand the tax credit chain better.

In this example, VAT is applied at every stage of the sale, and the registered seller receives a tax credit (or refund) on the VAT paid on purchases.

VAT registration in UAE

VAT law in UAE mandates that businesses must mandatorily obtain VAT registration if the total value of taxable supplies and imports in a year exceeds AED 375,000. Also, businesses in UAE can voluntarily obtain registration if the total value of supplies and imports or expenditures in a year exceeds AED 187,500.

Businesses in UAE can complete the VAT registration process through the FTA’s website.

Types of supplies under UAE VAT Law

There are different types of supplies under VAT in UAE. The VAT rates are decided based on the nature of the goods or services.

1. Standard-rated supplies: A 5% VAT rate will be applied to these goods and services.
2. Zero-rated supplies: These supplies attract 0% VAT. However, taxpayers can claim relevant input tax. These supplies include a few education services, healthcare supplies, goods and services exported outside the GCC, precious metals such as gold and silver, and international transportation etc.
3. Exempt supplies: These supplies are exempted under UAE VAT law, and businesses neither charge VAT nor claim input tax. You can not recover the input tax when selling or providing exempt goods or services. Exempt supplies include residential properties, undeveloped lands, public transport services, life insurance and certain financial services.
4. Deemed supplies: These are the supplies that do not fall under the definition of supply; however, businesses must charge VAT. Deemed supplies in UAE include 
   • Business assets sold without any consideration
   • Transfer of business assets from UAE to other GCC Implementing States or vice versa, and 
   • Goods utilised for the non-business purpose on which input tax is claimed, etc.
5. Out-of-scope supplies: The FTA kept these supplies out of the ambit of VAT law.

Input tax under UAE VAT

Input tax means the VAT paid or due to the supply of goods or services or during an import. Businesses in UAE shall keep the invoice and import documents to claim the input tax paid on the purchases.

VAT records in UAE

All businesses, registered and unregistered, must retain records such as 

• Balance sheet
• Profit and Loss
• Fixed assets records
• Payroll records
• Inventory records
• Accounting records covering sales, purchases, payments, receipts, revenues and expenses 

Also, the UAE VAT- registered businesses must keep the records for five years from the transaction date.

VAT returns in UAE

VAT-registered businesses shall submit the VAT return and make payment of VAT liability every quarter to the FTA. The registered taxpayers must complete VAT return filing and VAT payment before the 28th day from the end of the quarter. However, the FTA may assign a different tax period to a certain group of taxable persons.

Implications of VAT on individuals and businesses in UAE

The introduction of VAT impacts both individuals and businesses in the UAE. Here's how:

Implication on individuals:
The cost of living can increase slightly; however, it varies depending on that person's lifestyle and spending behavior. Suppose they spend mainly on things exempted from VAT; they won't see any significant increase in the cost.

Implication on businesses:
The VAT-registered businesses shall charge and collect VAT to all of their customers at the notified rate. Also, they shall pay VAT on the purchase of goods and services. When filing a VAT return, they must arrive at the net tax liability (difference between the VAT collected and paid) and pay the same to the government.

All these can be done when all transactions have been recorded accurately. Hence, businesses must record all transactions related to sales, purchases, income, costs, and related VAT charges.

Penalties for VAT offences in UAE

FTA has a right to impose penalties and fines on taxpayers whenever there is any violation of VAT law or rules. The Federal Law No. (7) of 2017 on Tax Procedures listed the penalties for violating UAE VAT law and tax evasion in UAE.

The below table explains the nature of the offence and its related penalties: