Knowledgebase

• Wilhelm von Siemen of Germany devised the concept of VAT in 1918
• Another French economist claimed to have invented the Tax itself.
• The Value Added Tax (known as TVA) was initially introduced in France by Maurice Lauré (Joint Director of the French Tax Authorities) on April 10, 1954
• Over 150 countries have implemented VAT (or its equivalent like Goods and Services Tax – GST) worldwide includes all 28 European Union Member States
• Generally introduced at relatively low rates (10% in UK in 1973) and then increased thereafter (UK now 20%)
• Each 1% increase in the VAT rate in the UK generates £5 billion additional tax revenue for Her Majesty’s Revenue and Customs (as per HMRC)
• VAT is one of the most common types of consumption tax found around the world.

VAT, being consumption based tax, is considered as a preferred means of raising public revenue and is adopted in most countries across the globe. Being a tax levied as a percentage of the price at the point of transaction, the impact of VAT on an individual consumer depends on his consumption.

In the recent years, GCC countries have begun considering the introduction of VAT. Countries like the UAE, Saudi Arabia, Qatar, Kuwait, Bahrain and Oman are working on a law that will introduce the VAT system.

• Less controversial – effectively, consumers have a choice not to buy goods or services so can avoid paying VAT
• Increase in tax rate of Indirect Taxes can generate significant additional tax revenues compared to similar increases in Direct Tax rates
• Personal Tax increase can act as disincentive to productivity as employees/ businesses pay higher taxes.

Value Added Tax (VAT) is an Indirect Tax. Occasionally we can find it referred to as a General Consumption Tax. VAT is considered an indirect tax because it applies to the final consumer that purchases the product or the service for its own consumption and not for further sale. In a country which has VAT, it is imposed on most supplies of goods and services.

Value Added Tax (VAT) is charged on most goods and services provided by VAT registered businesses in the country. It shall apply more or less to all goods and services that are bought and sold for use or consumption in the country. It is also charged on goods and some services that are imported from other countries.

VAT is chargeable at each level of supply chain and in general ultimate consumers bear the VAT cost while the Businesses collect and account for the tax. In the process of VAT collection and chargeability, business act as a tax collector on behalf of the government.

Business has to pays the government, the tax that it collects from the customers while it may also receive a refund on tax that it has paid to its suppliers. Net result is that tax receipts to government reflect the ‘value add’ throughout the supply chain.

To explain how VAT works we have provided a simple illustrative example below (based on a VAT rate of 10%):

Sales Tax is also a consumption tax just like VAT. Generally people think that there is no observable difference between how these two types of taxes (Sales Tax & VAT) work, but there are some key differences.

Sales Tax is generally imposed on transactions involving only goods and imposed on the final sale to the consumer. In general, Sales Tax to be charged by the seller to the end consumer of the goods.

This contrasts with VAT which is imposed on goods and services and is charged throughout the supply chain including on the final sale.VAT is being charged at each point of sale starting from producers till end consumer.VAT is also imposed on imports of goods and services so as to ensure that a level playing field is maintained for domestic providers of those same goods and services.

Many countries prefer a VAT over Sales Tax for a range of reasons like VAT is considered a more sophisticated approach of taxation as it makes businesses serve as tax collectors on behalf of the government and cuts down on misreporting and tax evasion.

Introduction of Value Added Tax (VAT) in the UAE came as a suggestion from IMF with a reason that the federal government of the UAE has no base income that can be controlled. Along with this the UAE is negotiating with the United States, the European Union, Australia and China on free trade treaties that will lead to the disappearance of customs duties which will result minimizing the income generated by other countries.

The UAE Federal and Emirate governments provide citizens and residents with many public services including medical, public transport, infrastructure, public schools, parks, waste control, and police services etc. These services are paid for from the government budgets. VAT will provide the UAE with a new source of income which will contribute to the continued providing high quality public services in future. It will also support the UAE government to move towards its vision of reduce dependence on revenue from oil and other hydrocarbons which traditionally has been its sole driver.

Fast paced growth ambitions of the UAE and the region and introduction of VAT constitute an important policy reform aiming to help GCC governments to achieve medium to long term social and economic policy goals.

The UAE’s co-ordination with other GCC countries on VAT implementation
The UAE is part of a group of countries which are closely connected through “The Economic Agreement between the GCC States” and “The GCC Customs Union”. The group of these countries is known as “Gulf Cooperation Council” GCC. The GCC group of nations has historically worked together in designing and implementing new public policies which recognized as a collaborative approach in the best interest for the region. Access GCC VAT Framework GCC-VAT-Agreement.

KSA and UAE are implanting VAT with effect from 1^st January 2018 and other GCC countries also agreed to implement VAT by 2019.

UAE has issued its VAT Law which is to be effective from 1^st January 2018 @5% on all Goods and Services.
As per UAE VAT Law, every Resident person whose annual supplies are more than AED 375,000 in previous 12 months needs to be registered for Tax. A Resident person with annual supplies of more than AED 187,500 but less than AED 375,000 can voluntarily register for Tax. Once registered, registrant can not apply for tax de registration within 12 months from the date of registration.

A person, not exceeding the mandatory threshold limit on or before 1st January 2018, to calculate future business in next 30 days and if total of his business is expected to exceeds mandatory threshold limit within previous 11 months plus next 30 days, needs to get registered immediately.

A Person without a Place of Residence in the UAE or an implementing state, makes supplies in the UAE and no other Person is obligated to pay the Due Tax on these supplies in the State (Reverse Charge) requires to register for Tax.

Once registered, companies will be required to account for VAT on an ongoing basis with Federal Tax Authority (FTA).

As per Ministry of Finance (MOF), it would eventually become obligatory for all companies to be registered under the system when it is rolled out in the second phase, regardless of the reported revenues. The roll out date of the second phase of the implementation is still to be decided.

For further detail please visit UAE_VAT or Compliation of FTP ER & FF or “Resource Center” sections of this website. Regular updates are being posted in “Blog” & “Resource Center” sections of this website.

The UAE is about to follow the standard procedure set out globally for VAT chargeability, collection and payments. Businesses will be responsible for carefully documenting their business income and costs and associated VAT charges. Registered businesses and traders will charge VAT to all of their customers at the prevailing rate and incur VAT on goods / services that they buy from suppliers. The difference between these sums is reclaimed or paid to the government. The UAE Rules and Regulations for Tax Procedures can be accessed Simplified Version of Executive Regulations of UAE FTP.

As VAT is being implemented first time in the UAE, cost of living is likely to be increased slightly but this will vary depending on the individual’s lifestyle and spending behavior.

Since VAT is being implemented to help improve the economic base of the UAE, government should come up with specific rules and regulations which businesses are required to adhere and it will make the things clear that how much VAT they are charging for each transaction.

Federal Tax Authority (FTA) has released the UAE VAT Law, Federal Tax Procedures, Regulations of Tax Procedures UAE and Service Fee and Administrative Fines for the Tax Laws of the UAE. These can be access through VAT Decree-Law No. (8) of 2017 UAE- English “Resource Center” section of the website.