About VAT in the UAE
VAT was introduced in the UAE on January 1, 2018 at 7am on the day.
VAT is not collected by the government, rather it is collected by businesses at every stage of the supply chain on behalf of the government. Meanwhile, businesses can reclaim refunds from the government for VAT paid to suppliers. Thus, VAT will ultimately be borne by the final consumers rather than being a tax on business activity.
VAT is one of the most common types of consumption tax around the world. More than 150 countries have implemented VAT or its equivalent, Goods and Services Tax (GST), including all 29 European Union (EU) members, Canada, New Zealand, Australia, Singapore and Malaysia.
VAT Categories in the UAE
Under the UAE tax laws, VAT-applicable goods and services will be divided into three categories.
VAT at zero rate: Under this zero per cent VAT is charged, VAT credit available. Sales will still need to be recorded in companies’ VAT returns, as with other categories
VAT at standard rate: Under this 5 per cent VAT is charged. Most goods and services will likely fall in this category, including electronics, cars, dining out and entertainment. The 5 per cent VAT rate will be passed on to consumers, with VAT credit available for companies.
VAT exempt category: In this, VAT on inputs is not passed on to consumers, thus no VAT credit is available. Corporates will not be able to recover or reclaim the 5 per cent VAT incurred on exempt items or services. Thus, exempt inputs have the potential to erode business profit margins.