VAT in the UAE: How Does Value-Added Tax Work?

Value-Added Tax (VAT) was introduced in the UAE in January 2018 at a rate of 5%. VAT is a consumption tax that is applied to goods and services, and it is intended to generate revenue for the government while diversifying income sources away from oil and gas. The tax is collected at each stage of production or distribution, with businesses reclaiming the VAT they paid on purchases and raw materials. For businesses, understanding the mechanisms of VAT is crucial to ensure accurate calculations and proper compliance.

Who is Liable for VAT in the UAE?

VAT is applicable to businesses whose taxable supplies exceed a certain threshold. This threshold is AED 375,000 per annum in taxable supplies. Businesses that fall under this threshold are not required to register for VAT but can choose to do so voluntarily. It is crucial for businesses to determine whether they are required to register, as failure to comply with VAT registration rules can lead to fines or penalties. Non-resident businesses are also subject to VAT if they conduct business in the UAE.

The Process of VAT Filing in the UAE

Filing VAT returns is an essential requirement for registered businesses in the UAE. VAT returns must be filed quarterly or annually, depending on the company’s turnover. The process includes declaring the output tax collected on sales and the input tax paid on purchases, with the difference being paid to the government or refunded if there is a surplus. Businesses must keep detailed records of all transactions to ensure accurate VAT filings. Failure to submit timely returns can result in fines or audits by the Federal Tax Authority (FTA).

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