VAT is an indirect tax. It applies to the consumption of goods or services at each stage of the supply chain, starts from manufacturing and ends at consumption. VAT is levied by VAT registered businesses which supply goods and services to operate their business. VAT has also apply to the importation of goods and services.
VAT levied at each stage of the supply chain. It is ultimately borne and incurred by the end consumer whereas it is collected by the registered businesses acting as a tax collector on behalf of the Government.
However, VAT has applied most to goods and services, there are some exceptions: it includes essential medicines, basic food items and exports of goods and international services comes under the category of zero-rated supplies. It is expected that health care and education services are exempted from the VAT.
VAT registered business pays the tax to the government which it collects from the customers. Such business can claim/ refund from the government on the tax that it has paid for the business purposes such as the purchase of raw materials and other consumables. On another hand for imports, VAT is charged at the first point of entry into home consumption (when customs duty may also apply).
It is confirmed and officially announced that VAT is going to implement from July 2018 in all six GCC member states at the standard rate of 5 per cent.
Before getting into how vat work for business, take a look at these 17 Most Important VAT Guidelines for UAE businesses.
In layman language how does VAT will work for a business in the UAE?
Table of Contents
How does VAT work for a Business?
At each stage of supply chain or sale transaction, companies or businesses will charge additional 5% VAT on all sales. VAT income will be collected when the invoice is paid.
At every particular year, the companies or businesses must have to pay the VAT income to the tax authorities.
However, before paying VAT to the tax authorities, companies or businesses will deduct any VAT that they had paid to the suppliers.
Generally, VAT income will be passed on to suppliers and the remaining will be provided to the tax authorities
If in case company or business has paid more VAT to the suppliers than it has received from the clients and then the tax authority will repay the VAT amount to the company.
So for a company and business, there is no real cash outflow because of the VAT. Individual consumers (just like you and me) cannot claim for the VAT back, so are the ones at the end of the chain who end up with the cost of the VAT. This is the whole procedure of VAT- it is a consumer tax not a business tax.
Registering for VAT
It’s not necessary that all businesses or companies will be required to register for VAT. Simply means that only businesses or companies who annual turnover crosses the limit specified by the respective VAT laws must register for VAT.
Many small businesses no need to register for VAT. We have taken the decision to secure small businesses from the extensive documentation and reporting that a system like VAT requires. However, businesses not required to register with the government if they only provide goods and services which are not subject to VAT.
It must be noted that, Yet the maximum and minimum turnover limit has not been finalized by the government law, which helps to identify businesses that do not need to register for VAT.
Once the information is disclosed or finalized, it will be shared publicly.
All businesses in UAE must maintain their financial records, day to day transactions and must sure that their financial records are updated on daily basis and accurate. Businesses who crosses minimum annual turnover limit must be required to register for VAT.
VAT Registered Businesses Generally focuses on below points:-
- It is essential to charge VAT on taxable goods or services they supply
- May claim or refund for VAT they have paid to suppliers or on business-related goods or services
- Maintain all business records in an appropriate manner which will allow the government to check that they have got things right
VAT registered business must report an amount of VAT you have charged and an amount of VAT you have paid to the government on a regular basis. It is likely to be done through online and a formal submission.
If business charged more VAT as compared to VAT paid, then the business has to pay the difference to the government. In vice versa condition, the business can claim or refund the difference.
File Returns for Regular Period of Time
VAT registered businesses will be required to file returns on a regular basis. For the majority of businesses, default time period for filing returns will be three months. Registered businesses file their returns via online just by availing e- filing services of the government.