What is VAT?
Value Added Tax (or VAT) is an indirect tax. Occasionally you might also see it referred to as a type of general consumption tax. In a country which has a VAT, it is imposed on most supplies of goods and services that are bought and sold.
VAT is one of the most common types of consumption tax found around the world. Over 150 countries have implemented VAT (or its equivalent, Goods and Services Tax), including all 29 European Union (EU) members, Canada, New Zealand, Australia, Singapore and Malaysia.
VAT is charged at each step of the ‘supply chain’. Ultimate consumers generally bear the VAT cost while Businesses collect and account for the tax, in a way acting as a tax collector on behalf of the government.
A business pays the government the tax that it collects from the customers while it may also receive a refund from the government on tax that it has paid to its suppliers. The net result is that tax receipts to government reflect the ‘value add’ throughout the supply chain.
The amount of VAT is decided by the state as percentage of the end-market price. As its name suggests, value-added tax is designed to tax only the value added by a business on top of the services and goods it can purchase from the market.
To understand what this means, consider a production process (e.g., take-away coffee starting from coffee beans) where products get successively more valuable at each stage of the process. When an end-consumer makes a purchase, they are not only paying for the VAT for the product at hand (e.g., a cup of coffee), but in effect, the VAT for the entire production process (e.g., the purchase of the coffee beans, their transportation, processing, cultivation, etc.), since VAT is always included in the prices.
The value-added effect is achieved by prohibiting end-consumers to recover VAT on purchases, but permitting businesses to do so. The VAT collected by the state is computed as the difference between the VAT of sales earnings and the VAT of those goods and services upon which the product depends. The difference is the tax due to the value added by the business. In this way, the total tax levied at each stage in the economic chain of supply is a constant fraction.
VAT is on the verge of implementation in UAE as well and will be introduced across the UAE on 1 January 2018 at a standard rate of 5%.
In general, countries that have a VAT system requires some businesses to be registered for VAT purposes. VAT registered businesses can be natural persons or legal entities, but countries have different thresholds or regulations specifying at which turnover levels registration becomes compulsory. Businesses that are VAT registered are obliged to include VAT on goods and services that they supply to others (with some exceptions, which vary by country) and account for the VAT to the taxing authority. VAT-registered businesses are entitled to a VAT deduction for the VAT they pay on the goods and services they acquire from other VAT-registered businesses.
Who will be required to register for VAT in UAE ?
A business must register for VAT if their taxable supplies and imports exceed the mandatory registration threshold of AED 375,000.
Furthermore, a business may choose to register for VAT voluntarily if their supplies and imports are less than the mandatory registration threshold, but exceed the voluntary registration threshold of AED 187,500.
Similarly, a business may register voluntarily if their expenses exceed the voluntary registration threshold. This latter opportunity to register voluntarily is designed to enable start-up businesses with no turnover to register for VAT.
A VAT return is a form you file with the authority, usually as asked by the authority, to show how much VAT you are due to pay them. If you’re not registered for VAT, you won’t be able to file VAT returns.
The VAT return shows the calculation of the amount of VAT due on sales minus the amount of VAT reclaimable on purchases and expenses. The result is the amount payable to the authority.
If the amount reclaimable on purchases and expenses is more than the amount due on sales, the authority will give you the difference back in the form of refund.
Return filing in UAE:
Taxpayers must file VAT returns with the FTA on a regular basis (quarterly or for a shorter period, should the FTA decide so) within 28 days from the end of the tax period in accordance with the procedures specified in the VAT legislation. The Tax returns shall be filed online using eServices.