Introduction of Value Added Tax (VAT) in the UAE
All the Member countries of the Gulf Cooperation Council (GCC) have signed a unified VAT agreement which enables the implementation of a formal VAT system across all the member states of the GCC.
The VAT agreement forms the basis of all the existing VAT laws and regulations in the UAE and other GCC member countries. In addition to the VAT agreement, the federal decree-law No. 8 of 2017 on value added tax also provides guidance relating to the implementation of VAT laws and regulations in the UAE and it will also form the basis for any future VAT legislation in the UAE.
VAT has been effectively applied on business transactions in the UAE and Saudi Arabia from 1 January 2018. However, as per the VAT agreement all the GCC member states are required to implement VAT in their respective countries by 1 January 2019.
What is Value Added Tax (VAT)?
VAT is a type of consumption tax that is levied on use/consumption of goods and services. VAT falls in the category of indirect taxes and currently it is employed in more than 180 countries around the globe.
It is charged by business entities or individuals that are registered for VAT, on account of supplies of goods/services to customers in the normal course of their business operations. VAT is levied at each stage in the supply chain. It is the end-consumer of the goods/services that bears the VAT cost. VAT registered businesses act as agents of government and therefore they first collect and then they account for the collected tax on behalf of the government.
How VAT Works in the UAE?
VAT is charged on business transactions involving supply of goods and services to customers. The VAT registered businesses charge VAT by adding it to the amount of goods/services that are provided to the customers for either business or personal use. The businesses that are registered for VAT in the UAE have the right to reclaim VAT paid to suppliers on goods purchased or services received for business purposes. The difference between VAT charged to customers and VAT charged by suppliers is reclaimed or paid to the government by the business entity.
For Imports, VAT is charged when goods enter in the country in which they will ultimately be used or consumed.
Businesses registered under VAT will be responsible for ensuring the documentation of their business income, costs and associated VAT charges.