As we all know, VAT is a tax on the consumption or use of goods and services levied at each point of sale. VAT is a form of indirect tax and is used in more than 180 countries around the world and UAE is one among them. The end-consumer ultimately bears the cost. Businesses collect and account for the tax on behalf of the government. It was introduced in UAE on 1st January, 2018. The rate of VAT is 5 per cent. VAT will provide UAE with a new source of income which will be continued to be utilised to provide high-quality public services. It will also help government move towards its vision of reducing dependence on oil and other hydrocarbons as a source of revenue.
IMPLICATION OF VAT ON INDIVIDUALS:
VAT, as a general consumption tax in Dubai, will apply to the majority of transactions in goods and services. A limited number of exemptions may be granted. As a result, the cost of living is likely to increase slightly in Dubai, but this will vary depending on an individual’s lifestyle and spending behaviour. If an individual spends mainly on those things which are relieved from VAT, he is unlikely to see any significant increase. The government will include rules that require businesses to be clear about how much VAT an individual is required to pay for each transaction. Based on this information, individuals can decide whether to buy something.
IMPLICATION OF VAT ON BUSINESSES:
Businesses will be responsible for carefully documenting their business income, costs and associated VAT charges. Registered businesses and traders will charge VAT to all of their customers at the prevailing rate and incur VAT on goods/services that they buy from suppliers. The difference between these sums is reclaimed or paid to the government.
VAT – REGISTERED BUSINESS GENERALLY:
- must charge VAT on taxable goods or services they supply.
- may reclaim any VAT they have paid on business-related goods or services.
- keep a range of business records which will allow the government to check that they have got things right.
VAT-registered businesses in Dubai must report the amount of VAT they have charged and the amount of VAT they have paid to the government on a regular basis. It will be a formal submission and reporting will be done online. If they have charged more VAT than they have paid, they have to pay the difference to the government. If they have paid more VAT than they have charged, they can reclaim the difference.
CRITERIA FOR REGISTERING FOR VAT:
- A business must register for VAT if its taxable supplies and imports exceeds AED 375,000 per annum.
- It is optional for businesses whose supplies and imports exceed AED 187,500 per annum.
HOW IS VAT COLLECTED IN DUBAI?
- VAT-registered businesses in Dubai collect the amount on behalf of the government and consumers bear the VAT in the form of a 5 per cent increase in the cost of taxable goods and services they purchase in the UAE.
- UAE imposes VAT on tax-registered businesses at a rate of 5 per cent on a taxable supply of goods or services at each step of the supply chain.
- Tourists in UAE also pay VAT at the point of sale.
ON WHICH BUSINESSES DOES VAT APPLY?
VAT applies equally on tax-registered businesses managed on the UAE mainland and in the free zones. However, if the UAE Cabinet defines a certain free zone as a ‘designated zone’, it must be treated as outside the UAE for tax purposes. The transfer of goods between designated zones are tax-free.
FREE ZONES IN UAE:
Free Zone, also known as Free Trade Zone, is an area designed to promote the international business in UAE by providing 100% foreign enterprise ownership. Free Zones offer attractive incentives such as no requirement for a UAE national as a local partner/shareholder, tax exemptions on duties and taxes such as Corporate, Personal Income Tax, all import and export duties etc. The businesses in Free Zones are required to obtain the necessary licenses from the respective Free Zone authorities and comply with their guidelines when operating the business in this region.
FREE TRADE ZONE UNDER VAT REGIME:
First and foremost point which businesses need to take a note is that ‘All Free Zone’ may not be a ‘VAT Free Zone’. This is evident from the definition and provisions defined in the UAE VAT Law and Executive Regulations. In UAE VAT law, VAT Free Zones are called ‘Designated Zones’ and the executive regulation prescribes the conditions which a Designated Zone needs to fulfil.
WHAT IS A DESIGNATED ZONE?
Designated Zone refers to an area specified by a cabinet decision and that meets the conditions specified in the Executive Regulation. For the purpose of VAT, a Designated Zone will be treated as being outside the state and any supplies between Designated Zones will not attract VAT at 5%.
For example, Rose Traders located in Jebel Ali Free Zone supplied goods to A-One Traders, Dubai Airport Free Zone. Here Jebel Ali Free Zone and Dubai Airport Free Zone Designated Zones. The actual list of Designated Zones will be made available after the cabinet decision. The supply of goods from Rose Traders to A-one Traders will be VAT free since the supply is between Designated Zones.
WHAT ARE THE CONDITIONS FOR DESIGNATED ZONES?
- Designated Zone Should be within a specific fenced geographical area.
- It should have security measures and customs controls in place to monitor entry and exit of individuals and movement of goods to and from the area.
- It should have internal procedures regarding the method of keeping, storing and processing of Goods with the Designated Zone.
- The operator of the Designated Zone should comply with the procedures set by the Authority.
LIST OF DESIGNATED ZONES IN UAE:
- Free Trade Zone of Khalifa Port
- Abu Dhabi Airport Free Zone
- Khalifa Industrial Zone
- Jebel Ali Free Zone (North-South)
- Dubai Cars and Automotive Zone (DUCAMZ)
- Dubai Textile City
- Free Zone Area in Al Quoz
- Free Zone Area in Al Qusais
- Dubai Aviation City
- Dubai Airport Free Zone
- Hamriyah Free Zone
- Sharjah Airport International Free Zone
- Ajman Free Zone
UMM AL QUWAIN:
- Umm Al Quwain Free Trade Zone in Ahmed Bin Rashid Port
- Umm Al Quwain Free Trade Zone on Sheikh Mohammed Bin Zayed Road
RAS AL KHAIMAH:
- RAK Free Trade Zone
- RAK Maritime City Free Zone
- RAK Airport Free Zone
- Fujairah Free Zone
- FOIZ (Fujairah Oil Industry Zone)
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