VAT stands for Value Added Tax. It is the Tax levied by the government on different businesses and their products at various stages of production. It is similar and comparable to the Sales Tax. Its essential purpose is to compensate and make businesses pay for the services and infrastructure provided by the government and the taxpayers. VAT scales and percentages vary on a country-to-country basis.

History of VAT in UAE

Value-added Tax was implemented in the United Arab Emirates on the 1^st of January, 2018. The rate of value-added Tax implemented back then was 5%. Though the rates can be increased over a period of time, the government of UAE has retained it at 5% for three years.

Types of VAT in UAE?

There are three different categories of VAT levied in the UAE.

Taxable VAT

There are different types of businesses on which VAT is levied. The businesses falling in the 5% Tax category include the following:

• Almost all the Counter Retail
• Food at Restaurants and Hotels
• Construction Supply
• Hardware Tools
• Leisure Spots
• Entertainment Activities.

0% VAT

Certain services fall under the 0-Tax category. These businesses must display zero value in their invoices. These include the following:

• GCC exports without VAT implementation
• Passengers Travelling internationally.
• Products transfer within the UAE.
• Primary and Secondary Education

Exempted VAT

Some certain businesses and services are exempted from the VAT.

• Public Transport
• Interest-based Loans/ Services
• Residential Rent/ Repurchase

Which Businesses Qualify for VAT?

In UAE, Businesses that receive goods(taxable) of more than 375,000 AED annually have mandatory VAT. Similarly, businesses that import goods worth more than 187500 AED have the optional choice of VAT registration. 

Who receives VAT in UAE?

Government or State does not collect VAT directly. Instead, it is charged on the purchases and sales and is paid to the sellers. This leads to the concepts of Input and Output Taxes. Based on those taxes, VAT is calculated, VAT returns are filed, and VAT is paid within 28 days of the end of Tax-period.

How to Register for VAT?

Federal Tax Authority (FTA) regulates the Tax return in UAE. You have to register on the official FTA website in order to pay VAT.

Steps to Register:

• Visit the official FTA website
• Sign up and Create your account
• Start the Registration process from FTA’s portal
• Enter all the relevant information and attach the documents
• Submit your application

Upon completing the registration process, you will be assigned a unique Tax Registration Number that can be used to sign up and log into your VAT Tax portal.

On this Tax portal, you have to file the VAT returns, which include the details of all the earnings and expenses, on the basis of which Input and Output Taxes are calculated. This further leads to VAT calculation.

How to Calculate VAT?

While the applicable rate is set at 5%, which happens to be among the lowest rates in Pakistan, output and input taxes are involved in the calculation of VAT.

Output Tax:

Output Tax is the Tax received by the sellers as a percentage of the selling price. For instance, if the VAT is 5%, the sellers will receive 5% of the original price as VAT.

Input Tax:

On the other hand, Input Tax is the Tax paid by a buyer according to the VAT percentage when purchasing certain goods. It is also called the VAT credit or recoverable VAT since it can be reclaimed.

The following formula can calculate the total payment of VAT:

VAT = Output Tax – Input Tax

How to pay VAT?

Registered businesses can use any of the four following channels for paying the VAT through the official website of the Federal Tax Authority

• paying via eDirham or credit card
• via eDebit
• via bank transfer – local transfer
• via bank transfer – international transfer.