A value-added tax (VAT), known in some countries as goods and services tax (GST), is a type of indirect tax that is collected by the businesses at each stage of the supply chain and paid to the government, based on the value added to the product or services at each stage of production/process/value addition. It is ultimately borne by the end consumer/user of the products or services.
VAT is the new tax under the tax regime in UAE, the government expects an estimated AED 12 Billion collection in the first year of implementation. Presently custom duty and luxury taxes are charged as indirect tax in UAE. VAT will be a new source of revenue for the government which will reduce the government’s dependence on Oil & Gas as a source of revenue. The VAT revenue will be used to provide UAE residents with high quality public services and world class infrastructure. More than 150 countries throughout the world have already adopted VAT/GST.
All six GCC countries have agreed on a broad framework for the introduction of a general tax on consumption in GCC to be known as VAT and have signed Common VAT Agreement of the States of the Gulf Cooperation Council (GCC). Saudi Arabia is the first country in GCC which has already published VAT Implementing Regulations.
The standard VAT rate of 5% shall be applicable on supplies of goods and services. This will be applicable to the products and services which are not exempt or zero rated. So basically, there will be 3 categories of supplies.
a. Taxable supplies at standard rate
b. Zero rated supplies
c. Exempt supplies
The government can only provide information and guidelines through their website, electronic media and various workshops but will not help businesses to buy new technologies, hire tax consultants or accountants. Government is giving sufficient time to businesses to prepare for VAT implementation.
a. Mandatory registration - Business entities will have to register with FTA if their gross turnover/revenue/import exceeds AED 375,000.
b.Voluntary registration - Business entities will have option to register with FTA if their gross turnover/revenue/import/expenses is/are between AED 187,500 to AED 375,000. Expense threshold also included in voluntary registration so that new startups can also register for VAT.
Electronic registration can start any time in the third quarter of 2017 on a voluntary basis and for those who should, but chose not to register, the mandatory registration will start from the fourth quarter of 2017.
Non-residents will be required to register for VAT if they make a taxable supply in UAE exceeding the limit of AED 375,000 and there is no other registered entity taking the responsibility for accounting of these taxable supplies. If the other entity takes the responsibility like the reverse charge mechanism, the non-residents are not required to register.
The Registered entities will have to maintain proper VAT records and file a periodic return to the FTA on a regular basis with details of VAT paid and VAT collected and settle the net difference with the FTA.
Entities need to file VAT returns 4 times in a year which can further be defined as quarterly return. These returns are required to be filed within 28 days from the end of the quarter. FTA has the right to decide a shorter period (for example monthly) for filing of VAT returns.
It is not yet clarified in the draft about the tenor of payment of the VAT but it may be within 28 days from the end of the month which is also the deadline to file VAT return. An entity needs to pay the difference amount of the output tax and input tax to the authority.
Once the return is filed, the authority will refund VAT on verification to avoid any frauds. It is most likely the refunds will be processed online in the form of direct electronic transfer to the bank account.
If one VAT Group of the group companies is formed (consisting of all the sister/subsidiary/associate companies) after meeting certain legislation requirements then there is no need to charge VAT on the inter-company transactions among the same group. VAT Group will be responsible to make payment of VAT and file the statutory returns.
Zero rated supplies are goods and services that will be taxable but at the rate of zero percent. Even though a zero percent rate is charged on supplies to the consumer, a VAT registered entity can claim input tax credit on inputs used in making the zero-rated supplies.
Exempt supplies are those goods and services that are not directly subject to VAT. This means that VAT cannot be charged on the sale of exempt supplies. Entities engaged in supplying exempt goods and services cannot claim input tax credit on purchases associated with the exempt supplies.
The authority will introduce a scheme to allow UAE Nationals who are not registered for VAT to claim VAT paid on building material and services to construct a new residence for personal and family use.
Yes, the entity can object within 20 days of getting the notification from the FTA and FTA will have 20 days to respond. There are higher levels of appeal to Tax Dispute Resolution Committee and there after Competent Court.
Yes, an entity is obliged to pay VAT on all the imports of the products except the sectors which fall under zero tax and/or exempt categories. The VAT shall be applicable on the value of the product that includes the custom duty.
The importer cannot use the reverse charge mechanism and must pay import VAT and cannot recover this VAT. This import VAT should be recoverable in the GCC country to which the goods are transferred.
Where import VAT was recovered in the UAE under the anticipation that goods would not be transferred to another GCC State, but at a later date if the goods are moved to another GCC country, the tax payer will be required to “repay” the import VAT by treating the transfer as a deemed supply subject to VAT.
Amount which cannot be recovered from debtors is known as bad debts. The VAT which was paid on the invoices turned into bad debts can be reduced from the output tax liability. One has right to declare and reclaim the VAT on bad debts by specifying the details of the invoices and the amount with complete supporting witnessing about the bad debts.
It is expected that VAT may be applicable on some fee based financial services and remaining services may be exempt. Margin based financial services are likely to be non-taxable. It is yet to be completely clarified in the legislation.
Supplies by the government entities will attract VAT except any specific supplies which will be excluded, exclusion will be decided by the authority. Any supplies to the government entities will be taxable at the standard rate if the supply is not zero rated or exempted.
As per the GCC Common VAT Agreement should an invoice be issued or consideration paid before 1st January 2018 or prior to the registration date of the supplier and the supply occurred after such date, then the authority may ignore the date of the invoice or payment and consider the tax due date to be the date of supply of goods or services. And the supplies will be taxable.
Any supplies after the VAT comes into effect will be taxable. If the buyer agrees the supplier can charge VAT over and above the contract prices. If the buyer does not agree the contract prices will be considered as VAT inclusive prices.
In case of continuing supplies that are partially performed before 1st January 2018 and partially after such date, then the tax shall not be due on the part performed before 1st January 2018.
The term “reverse charge” conveys that the recipient of the goods or services has to self-account the VAT due in a given transaction. This is an exception to the general rule that supplier, the person carrying out the supply of goods and services needs to collect and pay VAT (to the government).
Any registered or required to be registered entity must issue a VAT invoice or a simplified VAT invoice. The format will be prescribed in the legislation. So, it is likely that cash receipt is not an option. The legislation may also prescribe different provisions for the businesses following cash accounting system.
Partial exemption will come into the picture when an entity is into the supply of taxable and exempt supplies. In case of exempt supplies the entity will not be able to recover the input tax related to exempt supplies. If the expenses (common) are related to both taxable and exempt supplies then the expenses will be apportioned in both.
Sales or lease of all the commercial properties will be taxable at standard rate i.e. 5%. Residential properties will be generally exempted. The first supply of residential properties within 3 years from the completion will be zero rated.
The resultant challenge of VAT implementation pronouncement is to align the Business model with the government reporting and compliance requirements. We can help businesses to successfully and smoothly implement VAT into their business and support them on a continuous basis to meet the compliance and reporting requirements.
VAT orientation training to familiarize with the concept.
Review and assessment of accounting systems impacted by VAT
Assessing if the existing IT infrastructure can handle VAT
Coordination with the IT team to configure new reporting requirements
Identifying the human resource requirements
Advice to map accounting chart like Input, Output VAT & Control account.
Assessing the impact of VAT on Cash flow and profitability
Communication with the impacted stakeholders
Verification of VAT related transactions
Preparation and submission of periodic VAT Returns
Acting as your tax agent and assisting to prepare for tax audits
Guiding in maintaining proper books of accounts and financial records.
Preparing a customized implementation plan to include all the above and supervise the timely implementation.
All credit/debit cards details and personally identifiable information will NOT be stored, sold, shared, rented or leased to any third parties.
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