Now that VAT is a reality for people and businesses in the UAE, it would be useful to get acquainted with various VAT terms. These VAT terminologies are useful not only for accountants, CAs, and businesses in the country but also for the common man who now has to pay VAT on various goods and services.
Important VAT UAE Terms
Taxable entity: A business or person who is making supplies of taxable goods and services in the UAE and is required to register for VAT is a taxable entity. Only a taxable entity can charge VAT and pay it forward to the government.
Supply: The act of selling a good or service by the manufacturer or a dealer to another party is called a ‘Supply’. A taxable supply is a type of supply on which tax is leviable.
Place of Supply: In case of goods, the place of supply is the location where the actual exchange of goods takes place. In case of service, the location of the supplier is treated as the place of supply.
Demand: The term simply refers to the requirement/request for a particular good or service in the consumer market. The supply and/or price of a commodity are usually affected by its market demand.
Tax Registration Number (TRN): It is a unique identification number assigned to each VAT-registered person/entity by the government. The TRN must be quoted by the registered businesses in the UAE on the VAT invoices produced against a supply to their customers. It must also be used at the time of filing VAT returns and making payment of tax.
Input tax: The tax paid by a UAE business while purchasing taxable raw materials or related goods or services is called the input tax.
Output tax: The tax collected on the supply of taxable goods or services by a registered business from the buyer is output tax.
Cascading Effect of taxes: If a business is making both the purchases and sales of taxable goods/services, they are bound to pay tax twice (one while making the purchase and another on the sale of the furnished item). This is called the cascading effect of taxes.
Input tax credit (ITC): In order to avoid the cascading of the VAT, the UAE government has integrated the provision of input tax credit under which the input tax amount paid by a business is reduced from their output tax liability.
VAT Return: This is a monthly/quarterly tax statement that needs to be filed by all VAT registered businesses in the UAE furnishing the details of their supplies, purchases, tax liability, input tax, etc.
Tax period: The period for which tax returns are needed to be filed and VAT is to be paid is called VAT tax period. VAT period in the UAE is monthly or quarterly depending on the annual turnover of the business.
Reverse Charge Mechanism: When a product or service is purchased from a non-registered supplier, the recipient is liable to pay the output VAT directly to the government (FTA) under the reverse charge mechanism.
Zero-rated supplies: The supply of certain goods/services on which VAT is levied at a zero rate. The businesses in UAE making zero-rated supplies need to file tax returns and mention a NIL or zero VAT on their tax invoices.
Tax-exempt supplies: The supplies (of goods and/or services) on which no VAT is levied. The UAE has exempted some specific supplies including the supply of some financial services, land, residential properties, etc from the VAT.
VAT Group: Two or more companies in the UAE that are related to each other can register as a VAT group. This reduces the VAT compliance for these companies. Also, all internal transactions performed within the VAT group are exempted from tax.
Federal Tax Authority (FTA): This is the official tax authority responsible for managing various tax-related tasks such as collecting federal taxes, charging fines, checking VAT compatibility and eligibility of businesses, submitting tax-generated revenues with the government, etc in the United Arab Emirates (UAE).