What is VAT in Dubai? UAE Value Added Tax Bill Explained
VAT refers to Value Added Tax which is an indirect tax on supplies of goods and services. Every country implementing the VAT system has the freedom to choose their own specific rules and tax rates to suit their specific economy and purpose.
The UAE has recently introduced the Value-added Tax system at the standard rate of 5% on various supplies. While most supplies are taxable under VAT, a few goods and services like public transport and education are kept out of VAT ambit. Here’s everything else you need to know about VAT in Dubai.
What is VAT?
VAT, or value-added tax, is a consumption-based tax that is charged on a product or service at each stage where the value is added in the supply chain. In simple words, VAT is a tax charged by the government during a supply on the added value of a product or service. It means VAT is charged on the supply of new as well as old goods.
VAT is applicable at each stage of the supply chain. The manufacturers, the dealers and other intermediary parties are required to pay tax at each stage of the supply, however, the final cost of the tax is borne by the consumer only, which doesn’t include the tax already paid on input costs.
VAT in Dubai
Dubai is one of the biggest Emirates in the United Arab Emirates and also the first among the ones to implement VAT from January 1, 2018. Dubai, because of its rich economic and technical stature, is one of the major regions to experience the VAT effects.
Dubai VAT is in the same line as in other Emirates. As per the Federal Decree Law No. (8) of 2017, the standard VAT rate of 5% is applicable to most of the supplies in Dubai, except for the supplies of exempted goods and services. VAT is a value-added tax and will be collected at each stage of a supply chain.
Let’s Check out the: UAE VAT Rate
Dubai, as of now, has no tax on income and other means of wealth.
Federal Tax Authority (FTA) is the official UAE government department responsible for the management of federal taxes such as VAT Dubai. It was established in 2016.
How does VAT UAE work?
VAT is of two types –
- Output VAT
- Input VAT
Output VAT is charged by manufacturers/sellers/dealers on the sale of a taxable product or service to consumers and other businesses.
Input VAT is the tax paid by a consumer or business on the price when purchasing a product or service. Here’s how the VAT system works in the UAE.
Dubai VAT registered manufacturers add 5% VAT on the sale price of an eligible supply. It means a product for which sale price is 100 AED will levy 5 AED as a tax when supplying to the dealer/distributor. The distributor has to pay an input tax (5 AED) when purchasing the item, which he will recover while selling the item to the consumer (read more on input tax recovery). The consumer has to pay 5% VAT on the purchase. The gross VAT goes to the government through the means of the manufacturer and distributor. The consumer is the one who pays the final tax amount.
When was VAT implemented?
The VAT was introduced in Dubai and other emirates of the UAE on 1 January 2018 as the first indirect tax system of the country.
What is the VAT rate in Dubai?
Same as all other emirates in the UAE, Dubai follows the same standard VAT rate of 5%. That means most of the supplies in the country will be taxed at the rate of 5%. However, some specific products and services have been included in zero-rate and tax-exempt categories of the VAT.
Zero-rate VAT will be applicable to the exports made out of the UAE. In addition, certain goods and services, including the supply of gold, silver and platinum, Charity organizations, International and Intra GCC transport and services, supplies made via sea, land and air modes of transportation, medical equipment and medicines are also zero-rated under VAT Dubai.
What sectors will be exempted from VAT Dubai?
A number of supplies of goods and services are exempt from tax. It means there will be no tax on the buy/sell of these products and services. An exempt supply is when goods or services are delivered in exchange for consideration but no tax is levied on such supplies. Input Tax Credit cannot be claimed for exempt supplies under VAT.
The following goods & services have been exempted from the VAT in Dubai.
- Financial Services that are provided for free, allotment or transfer of ownership of a debt of equity, transfer of life insurance ownership and re-insurance of a policy.
- The supply of residential properties with a lease term of more than 6 months
- Supply of bare land
- Local transport services for passengers via land, air or water within the State
- Supplies made within the VAT-free zones
- Healthcare services
- Some food items
What are the VAT conditions that would lead to penalties?
Just like every other tax system, VAT has provisions for a penalty in the cases of non-compliance. These cases include non-registration, late registration and late filing of VAT Returns.
For non-registration within the due date, a VAT eligible business will have to pay a penalty of Dh20,000.
For non-filing of VAT returns within the given deadline or late-filing, a business will have to pay a fine of Dh1,000 for the first offence, and Dh2,000 in case of repetition within 24 months. In addition, a penalty in the range of 1 to 4 percent will be levied on late payments of the VAT.
Penalties will also be levied on non-disclosure of due tax on imports, on submission of incorrect tax returns and many other cases. You can complete details here -> VAT Penalties in UAE
Will salary be taxed in Dubai?
No. As of now, these is no federal tax on salary and other income sources in Dubai and other UAE countries. The UAE charges tax only on the supplies made by a business, based on its annual turnover, and not on the actual income of that business.
Why is VAT implemented by the GCC?
The VAT was implemented by the UAE (and other GCC countries) with the aim to create an alternative source of income for the Federal Government and reduce their dependence on oil resources for income so that it can continue to provide high-quality public services to the citizens.
Major VAT rules in Dubai
- VAT on the supply of Second-hand goods: In case of second-hand goods, VAT would be levied at 5% rate only on the added value such as repairs or new parts and dealer’s commission or profit margin, etc.
- VAT registration is mandatory for Businesses with annual supplies and imports over AED 375,000.
- VAT registration is optional for businesses with annual supplies over AED 187,500
- VAT UAE rate is fixed at 5 percent.
- VAT free designated zones are considered outside the UAE for VAT purposes.
- A VAT return summarising the supplies and purchases made by a business, along with their VAT liability, during a particular tax period must be submitted by the due date.
- No input credit is available on exempted and zero-rated supplies.
- VAT paid on input costs can be reclaimed on supplies that are subject to VAT.
- UAE tourists can claim a refund of VAT paid by them on their purchase of goods (to be carried out of the country) in the UAE.
- The VAT liability in the UAE is determined based on the “Time of Supply.”
For more, check out: VAT Refund in UAE
Read more about VAT in Dubai
VAT Refund Dubai
VAT paid by businesses on the input cost (purchases) can be reduced from the output tax charged from the customer. The difference will go to the government. Tourists visiting the country can claim a refund of tax paid by them on the purchase of goods. Foreign companies visiting UAE for business purposes can also claim a refund of VAT paid by them.
Read this VAT Refund Blog: VAT Refund Scheme for Businesses in UAE
Dubai Airports will have VAT on services
Dubai VAT will be applicable to the services provided by both airports in Dubai at the standard rate of 5 percent.
Check out details here: Dubai Airports will have VAT on services
No Hike Government Fees in Dubai
In order to ease the tax burden on businesses and citizens, the Dubai government has decided not to increase fees on government services for the next three years.
Read More Blog: VAT Impact on Government Fees for Three Years in Dubai
UAE Retail sector continues to grow
VAT doesn’t seem to have a negative impact on the market as the retail sector of the UAE reported growth this year as well. The initial hiccups are now gone and businesses are adjusting to the VAT regime.
Let’s Check the Blog: Dubai Retailers Not to Increase Prices Ahead of VAT