VAT In the UAE explained
What is VAT
Value added tax (VAT) is a tax imposed on consumption, that means the final consumer bear the tax cost while businesses collect the tax and pay them to the Federal Tax Authority (FTA).
How does VAT work?
Businesses that are registered for VAT charge VAT to their customers on supplies of goods or services made in the course of business. Then they are required to collect the VAT which they have charged to their customers and, on a periodic basis, pay this over to the FTA, accompanied by the submission of a tax return.
Businesses charge their customers with ‘output tax’ which is VAT on sales. Business will also pay VAT to their suppliers when they acquire goods and services, which is known as ‘input tax’ or VAT on purchases.
Generally, registered businesses are able to recover the VAT on purchases, subject to certain conditions, by deducting this input tax from the value of the output tax, and pay the net to the FTA when filing the tax return.
Businesses that are not registered for VAT are not entitled to recover any VAT they incur. As a result, the VAT becomes a cost for them.
UAE VAT Rates
There are two VAT rates applicable in the UAE:
The standard rate of VAT (5%)
The zero rate of VAT (0%)
These rates are applicable to “Taxable Supplies” which are goods or services supplied for a consideration by a person conducting business in the UAE, and does not include “Exempt Supplies”.