Value Added Tax (VAT), Goods and Services Tax (GST), and Sales Tax are all confusing terms and are interchangeable. However, VAT and GST can be treated as the same in various countries around the world. Value Added Tax has only been recently becoming more and more popular. Around 166 out of 193 countries in 2018 deploy Value Added Tax on many of the items being consumed by that state’s citizens.
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What actually is VAT? This question can be answered by a simple explanation which is, VAT or Value Added Tax is the amount paid back to the government for using the services that government provides to the citizens as it has a great amount of influence in manufacturing, transporting and then finally making it reach to the customers, for example, the land, the permit of production, the raw material, Roads used for transportation, etc. In short, the government’s infrastructure or the system made it possible hence VAT must be paid for further development in the system and uplifting of society. So the end-consumer pays for it, and the businesses collect and submit it to the government.
The VAT in the UAE:
Even after implementing VAT worldwide, UAE decided to adopt it just recently on 1st January 2018 with a fair amount of 5%, unlike some other countries where it is much more. Implementation of VAT within the UAE has decreased the burden on oil and other fossil fuels as the only source of income for the government.
The companies have to register themselves in the Federal Tax Authority (FTA), and they will be allocated with the Tax Registration Number (TRN) to verify a company’s existence. No business is allowed to run without its verification from Federal Tax Authority.
Pre-requisites for Registration
If the annual income of a business is equal to or greater than AED 375,000 or if the taxable supplies and imports increase this above amount, then the business is bound to register and pay Value Added Tax on each of the taxable items; however, If the worth of the company increases from AED 187,500 annually, then it is optional.
As the government receives VAT from the company, it must be noted that it also refunds some amount on the tax that they have paid.
UAE has made it very easy and accessible to all businesses by converting it all into digital systems. All you have to do is make an account on the FTA website, fill out the form, and verify your identity. Detailed VAT-User Guidelines in PDF format are easily available with the complete registration process and all possible details.
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Collection of Value Added Tax
The end-user of the taxable item bears the value-added cost at each step of forming that particular item. All the services that are provided by the government, from manufacturing to transportation and finally reaching out to the citizens, are included. The amount is fixed at 5% of the item’s total cost in the UAE, which is quite reasonable. If they buy a taxable item, the tourists also have to pay the Value Added Tax, which only fair enough.
Sectors for application of Value Added Tax
Value Added Tax is imposed on almost all sectors, for example, services, goods, food, restaurants, commercial buildings, hotels, etc. It is also implemented equally on all registered businesses in all zones, whether it is the mainland or the free zones. However, some designated areas do not come under the UAE’s jurisdiction, and thus the transportation in between those zones is tax-free.
Return of VAT
At the end of the year, the tax-registered businesses are obliged to pay ‘VAT Return’ to the government. It is thoroughly calculated the total amount of services provided by the government used by those businesses and the amount of tax received by the businesses from the consumer end; this is called liability. If the difference between both the amounts is positive, that is, if the cost of the services used is greater than the amount of tax collected, then the company has to pay that amount to the Federal Tax Authority (FTA), and if the cost of services used by the company is less, then they are in a position to claim the difference of the amounts back from the Federal Tax Authority (FTA).
There is a standard procedure to claim a return, and the person must obey all the protocols. The Taxpayer has to submit an online application on the FAT portal.
For each type of business and the amount of turnover of a specific company, the time period of the return of VAT is decided. If the person fails to deliver, that company has to face serious circumstances under the violation of UAE Tax Laws that could result in imposed fines to start with.
The standard tax period is quarterly for the business with an annual turnover below AED 150 million and monthly for those companies having an annual turnover of more than AED 150 million.
Implementation of VAT has for UAE added a source of income for the government, which can now spend more on developing and increasing facilities. A VAT is only beneficial if the consumer buys the taxable items more and more. Still, it is only fair to clearly mention the items on which VAT is implemented and then let the customer decide whether they should buy it or not. There are other implications of VAT as well.
The companies have to register and verify their identity and the nature of the businesses they deal with. In addition to that, VAT forces the businesses to maintain the accounts properly and with detail and proper documentation.
UAE shares the implementation of Value Added Tax with other Countries that comes under the States of the Gulf Cooperation Council (GCC).