The recent decision taken by the UAE cabinet to exempt the trading (investments) of gold and diamond from VAT has been appreciated by industry experts. The cabinet, earlier this month, had released a law introducing the VAT under Reverse Charge Mechanism for investment in gold, diamond and other precious metals, under which a five percent VAT shall be levied on such supplies only for documentation purpose but no actual payment of VAT is to be made.
The step was taken following the adverse impacts of the introduction of VAT on the industry. According to reports, the sales of wholesale gold jewellery dropped by as much as 60 per cent in the first quarter of VAT launch.
Experts have been reviewing the possible impacts of removing jewellery trading from the VAT regime.
Even though the amount paid by traders while purchasing gold items is refundable to them at the time of making outward supplies, the delay in refund and the need to pay tax on inputs affect the cash flow in the business. Intermediate suppliers (traders) do not exactly have to bear any tax, however, they are liable to account for the VAT paid on B2B supplies, as per the norm of the value-added tax.
Since VAT is levied at each step of the supply chain, it effectively reduces the chance of tax evasion. This is one of the reasons why the UAE chose VAT over the Service Tax. However, the added tax on the sales of gold increased problems for the traders as they now have to pay tax on each transaction. The implementation of VAT has also decreased the demand among the buyers of gold and other precious stones.
As per the GCC VAT law, the trading of gold, silver and platinum (with a purity of 99 per cent or more) is zero-rated under the VAT, however, this rule is not applicable to the sales of gold or diamond jewellery.