VAT (Value Added Tax) is considered to be the most beneficial form of taxation and is hence implemented by more than 150 countries in the world. When the news of implementing the same was in talks in the UAE around 2 years ago, it was met with mixed reactions. VAT in the UAE was implemented on 1st January 2018 at 5%, which is among the lowest in the world. According to the recent reports, over 260,000 companies and over 10,000 groups have already registered for VAT.
Why is the UAE bringing in VAT?
The 5 Gulf States, along with the UAE, decided to bring in VAT as one of the measures to diversify revenues and increase the government income. Persistently low oil prices over the past 3 years have put a rather huge economic pressure on the Gulf Cooperation Council (GCC) countries. This has resulted in an urgent need to diversify revenue streams. Therefore, in a bid to raise non-oil revenue, the Ministry of Finance (MoF) decided to introduce VAT.
Important Facts About VAT in the UAE
- It is said that the 5% VAT which has been implemented since January will boost the UAE’s economy by Dh12 billion in the first year.
- It is mandatory for companies with annual revenues of over Dh3.75 million to register under the GCC VAT system. But eventually it will be made compulsory for all the companies to register under the same regardless of reported revenues.
- VAT has been categorized into 3 segments, namely. 5% standard rate, zero-rated, and exempt. The difference between zero-rated and exempt goods is that the suppliers of zero-rated goods and/or services can reclaim their input VAT, but the suppliers of exempt goods are either not registered for VAT or if they are, they cannot reclaim their input VAT.
- 5% standard rate is applicable on necessities such as food and beverage, clothes, shoes, fuel prices, hotel rents, cosmetic products and many more.
- The tax is exempted on categories like tuition fee for nurseries, medical fee, surgery cost, public transport, airline tickets and other government services.
- The zero-rated services are exports of goods and services, international transport of goods and passengers, first sale/rent of residential buildings and certain educational and related goods and services.
- The free zone companies that purchase goods and services for their business outside the free zone are also liable to pay VAT.
- One of the key benefits of this move will be a boost in the government revenues. Government is said to utilize the revenue generated from VAT collection on developmental projects. It will further help in increasing individual well-being and promote communal stability.
UAE’s is an incessantly progressing economy. The nation is also planning to introduce excise tariffs of 100% on tobacco and energy drinks, as well as 50% on sugary drinks. Analyzing the current scenario in Gulf nations, the introduction of VAT is said to be very crucial. Globally, the idea of VAT was put into practice years ago by many countries; therefore, it was essential for UAE to join the line for better future. This positive move will have a slight impact on day-to-day lives of middle class families, but in the long run the results will be fruitful.