There is a difference between Zero rated VAT and Exempted VAT in UAE. Zero rated VAT means you must charge VAT at 0%. Exempt VAT means you must NOT charge VAT. Zero rated VAT & exempted VAT are different from each other.
The implementation of VAT is set to be on 1 January 2018, being imposed on certain goods and services. However, the law laid out a couple of exemptions and zero-rated goods and services. FTA has defined different VAT Rates in UAE for different sectors.
Zero-Rated VAT vs Exempted VAT
Simply put, a zero-rated VAT is a supply of goods and services that are taxable but VAT is imposed at 0%. VAT-registered businesses that produce zero-rated supplies/services have the right to claim their input tax deductions that they have obtained in the course of producing the aforementioned taxable supplies. On the other hand, an exempt VAT is the supply of goods or services that are not subjected to any VAT rate.
What Does Zero-Rated VAT Mean?
Any goods and services are subject to zero rated when they are exported to a Gulf Cooperation Council (GCC) country that hasn’t implemented VAT just yet. This includes the passengers and goods that are transported internationally, as well as a transfer that starts or even ends in the UAE or cross any part of its region.
Good and Services Under Zero Rated Tax
Based on Article 45 of Federal Decree-Law Number 8 of 2017, there are 14 goods and services that are subject to zero-rated VAT.
i) Direct or Indirect Exports
The first on the list is the direct or indirect export outside the UAE to states in the GCC that do not implement VAT, as clearly stated in the Executive Regulation of this Decree-Law.
ii) International Transport
International airfares will be under the zero rate as it is stated that goods and services that are transported internationally starting or ending in the UAE or crossing any party of its region, which includes services related to such transport, will have zero rates applied on them.
iii) Air Passenger Transport
As mentioned on the third number in Article 45, the transport of air passengers in the country is also included “if it is considered an ‘international carriage’ pursuant to Article (1) of the Warsaw Convention for the Unification of Certain Rules Relating to International Carriage by Air 1929.”
iv) Supply of Air, Sea and Land Means of Transport
In accordance with the Executive Regulations of this Decree-Law, the supply of air, sea, and land means of transport for the transportation of passengers and goods are also under zero rate.
v) Goods and Services Related to the Supply of the Means of Transport
The supply of goods and services for the operation, repair, maintenance, or conversation of the aforementioned means of transport is zero-rated.
vi) Aircraft and Vessels for Rescue
Aircraft and vessels that are intended for rescue and assistance by air or sea will have zero rate applied on them.
vii) Supply of Goods and Services Related to the Transfer of Goods or Passengers
The goods and services for consumption on board, or anything at all that is meant to be consumed by any means of transport, any installations, or addition thereto or any other use during transportation shall be included in this application as well.
viii) Investment in Precious Metal
The eighth on the list is the supply or import of investment precious metals. In accordance with the Executive Regulation of this Decree-Law, it will specify the precious metals as well as the basis of the standards by which the aforementioned goods are classified for investment purposes.
ix) Sale of the Residential Building
In accordance with the controls specified in the Executive Regulations of this Decree-Law, residential buildings in its first three years of completion, may it be for sale or lease in whole or in part, shall be under zero rate.
x) Charitable Building Supplies
If the buildings are for the purpose of being used by charities, the first supply shall have zero rate applied to them (sale or lease).
xi) First Supply for Residential Building
Buildings that are converted from non-residential to residential will be under zero rate as well in its first supply (sale or lease).
xii) Oil & Gas
Crude oil and natural gas are under zero rate as number 12 on the list.
xiii) Educational Services
As per the Executive Regulation of this Decree-Law, zero rate shall apply to educational services and related goods and services for nurseries, preschools, elementary education, and higher education institutions that are owned or funded by the federal or local government.
xiv) Healthcare Services
The last on this list is, in accordance with the Executive Regulation of this Decree-Law, the supply of preventive and basic healthcare services and related goods and services.
Goods and Services Exempted from VAT
There are only four items that are listed as exempted from VAT as per Article 46 of the Federal Decree-Law Number 8 of 2017:
i) Financial services that are specified in the Executive Regulation of this Decree-Law
ii) Supply of residential buildings through sale or lease, other than that which is zero rated according to Clauses (9) and (11) of Article (45) of this Decree-Law
iii) Supply of bare land
iv) Supply of local passenger transport
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