A value-added tax (VAT or V.A.T.), known in some countries as a goods and services tax (GST), is a type of tax that is assessed incrementally. It is levied on the price of a product or service at each stage of production, distribution or sale to the end consumer. If the ultimate consumer is a business which collects and pays to the government VAT on its products or services, it can reclaim the tax paid. It is similar to and is often compared to a sales tax.
The introduction of VAT will significantly change business accounting operations. This guide explains the basics of VAT and it’s impact on businesses and consumers.
This section will cover the following topics
Tax can be defined as a fee charged by the government on goods, services, income and other transactions in order to finance public services and government expenditure. There are two major tax categories:
A direct tax is paid directly to the government by the taxpayer.
An indirect tax is paid to the government by an intermediary, who collects the tax from the taxpayer on behalf of the government.
The VAT is an indirect tax levied on the consumption or use of goods and services. It is charged at each step of the supply process. The end consumers bear the costs of VAT while registered businesses collect and account for VAT, acting as tax collectors on behalf of the government.
Let’s consider the following example to see how the VAT system works:
A manufacturer who produces plasma television sets sells a TV to a wholesaler for AED 1000. Under the new tax system, the manufacturer collects a VAT of 5% (AED 50) from the wholesaler on behalf of the government. The wholesaler then pays a total amount of AED 1050.
The wholesaler increases the selling price to AED 2000 and sells it to a retailer. The wholesaler collects a VAT of 5% (AED 100) from the retailer on behalf of the government, while also receiving a refund of the VAT paid to the manufacturer in the previous step. The retailer pays a total amount of AED 2100.
The retailer further increases the selling price to AED 3000 and sells it to the end customer. The retailer collects a VAT of 5% (AED 150) from the end customer, while also receiving a refund of the VAT paid to the wholesaler in the previous step.
The end customer pays a total amount of AED 3150 for the plasma TV set.
A value added tax is applied at every stage of the sales process, and the registered business receives a refund (or tax credit) on the VAT paid at the previous step. The Federal Tax Authority (FTA) has specified a fixed VAT rate of 5% for the sale of goods and services in the UAE.
The UAE delivers excellent public services, including healthcare, education, public transportation, and social services. The introduction of a VAT will allow the government to diversify their sources of income and continue to ensure a good standard of living for UAE residents. The implementation of VAT is expected to generate AED 12bn of revenue in it’s first year and up to AED 20bn in the second year.
Registration may be mandatory or voluntary, depending on the business revenues generated.
1. Mandatory Registration
2. Voluntary Registration
A business can voluntarily register for VAT if the total value of their taxable sales and imports within the UAE exceeds the voluntary registration threshold of AED 187,500 for the previous 12 months or within the upcoming 30 days.
Startups and small scale businesses have the option of registering voluntarily if their expenses exceed the voluntary registration threshold, thereby making them eligible for tax credit.
VAT came into effect starting on January 1st, 2018. The electronic registration portal for VAT opened from the fourth quarter of 2017 on the FTA website. Businesses could register online by logging in to the electronic registration portal starting from 1st October 2017.
The VAT rate is 5% for most goods and services except for these exempted or 0% tax categories:
The VAT regime will lead to major changes for business account maintenance. Businesses that meet the minimum annual turnover requirement must register for VAT. Businesses not registered for VAT should maintain their financial records in any event, in case the government needs to establish whether they should be registered. Every business owner registered under VAT must maintain the following records:
An invoice is a document which records the details of a taxable supply made. Only VAT registered businesses are authorized to issue tax invoices. The receipt of a valid tax invoice is the primary documentary evidence to support the purchaser’s VAT recovery. Apart from invoices issued for supplies made, business owners must issue separate invoices for purchases made from vendors or suppliers. A valid tax invoice must include the following information:
Credit notes are issued when products are returned for a refund, when an invoice amount has been overstated, or in other circumstances where the business must issue a refund to their customer. It is a document sent by a seller to a buyer notifying them that a credit has been made to their account against the goods returned by the buyer.
Debit notes are issued when the amount payable by a buyer to a seller increases (due to extra goods delivered or goods already delivered charged incorrectly). These can be issued as a letter or formal document specifying future liability.
Invoices that are issued once cannot be altered. Credit/debit notes are issued as explained above when there is a modification made to an existing transaction.
Note: VAT registered businesses must maintain the specified bookkeeping records for at least 5 years from the date of transaction.
With Alya Auditors, you can rest assured that you won’t have to go through the headache and stress from complying with your tax obligations. Our team of regulated tax agents in Dubai is here to help. Whether you are already running an established online business or you are still getting your online business off the ground, we will be very happy to provide you with the expert help you need in getting your business in order.
Leave us a message or give us a call to get more useful information from our team of VAT Consultants in UAE.