What is VAT?
Value-Added Tax (VAT) is a kind of consumption tax that is linked to a product whenever values are added every step of the supply chain, i.e. for materials and/or parts from other suppliers, in the process of manufacturing, and the product’s final sale. VAT is usually confused with sales tax by many. Sales taxes are placed on the final sale of goods unlike VAT, where taxation applies to each step of the supply chain.
VAT introduction in the UAE
Even though UAE is generally perceived as a completely tax-free country due to lack of income tax, this notion is untrue. Just to name a few, there are tourism fees, municipality tax, property tax, and custom duties that are imposed on consumers and businesses. However, VAT is going to be implemented in the UAE for the first time.
The Gulf Cooperation Council, consisting of six Gulf States, jointly agreed to a framework VAT Agreement in order to diversify their economic resources from oil and hydrocarbon industries and will be drafting their own national laws regarding its implementation. Governments usually impose VAT in order to increase revenue and provide more public service.
- The legal framework for the UAE VAT is currently being finalized and will be published in the near future, in which taxed and untaxed goods and services will be clearly specified.
- VAT introduction in the UAE will begin on January 1st, 2018.
- The Gulf Cooperation Council decided on a 5% VAT rate to be implemented, which is also the UAE VAT rate.
- Cost of living might increase as a result depending on the lifestyle and preferred goods and services.
- The UAE Federal Tax Authority is established.
What kind of goods and services are included or exempt from the UAE VAT or will be zero-rate VAT?
Even though household expenses might increase after the 5% levy on certain goods and services, basic expenditure on essentials is expected to remain the same. However, the confirmed information on the list of items excluded and included is yet to be received. Therefore, a new law, however, has yet to be released to specify which items are non-taxable and taxable after VAT implementation.
The vastly anticipated new law will shine light to a lot of ambiguities regarding VAT introduction in the UAE. Moreover, the terms concerning, to whom the new VAT will be applicable, registration, filing, calculation of VAT and payments, audits and several other details which is sought after, can be ascertained only once the new VAT law is in place.
Business owners should consult reputable accounting and legal firms in order to get a proper assessment on how VAT implementation will affect their companies to understand the upcoming legislation and ensure that they fully comply with the government’s rules and regulations. It is advisable that businesses should initiate a VAT impact assessment in order to determine the impact that VAT implementation will have across their operations. Such assessment shall draw a clear plan to the steps that must be taken to be ready for VAT from 1 January 2018.
For consumers however, it could be wise to purchase goods and services prior to VAT implementation in the UAE, as the price spike in automobiles or luxury items could be significant.
Getting the right information is key!