Home Income Tax Difference between zero rated VAT Vs exempted VAT
Difference between zero rated VAT Vs exempted VAT

Difference between zero rated VAT Vs exempted VAT

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Difference between zero rated VAT Vs exempted VAT

The Fotolia/Raw Pixel Value Added Tax (VAT) was implemented in the UAE on January 1, 2018, with a 5% rate. The VAT, as a general consumption tax, will apply to the vast majority of goods and service transactions. At each step of the supply chain, the UAE charges VAT on tax registered firms on taxable supplies of products or services. VAT-registered companies collect the money on behalf of the government; consumers pay the VAT through a 5% rise in the price of taxable products and services in the UAE.

The VAT Decree-Law N (8) of 2017 on Value Added Tax may be seen here. If taxable supplies and imports surpass the statutory registration level of AED 375,000, a firm must register for VAT. Furthermore, if the total amount of taxable supply and imports (or taxable costs) exceeds the voluntary registration level of AED 187,500, a firm may opt to register for VAT voluntarily.

Some free trade zones have been declared as designated zones by the UAE cabinet. For tax reasons, these are considered “outside the UAE.” It is tax-free to transfer goods and services within and between these zones. The list of authorised zones may be seen here. More information about VAT and how to register for VAT with the UAE’s Federal Tax Authority (FTA) may be found here. The VAT user guide may also be found here. VAT registered firms or ‘taxable persons’ must file a VAT return to the FTA at the end of each tax period. Please go here for a link to a guideline that outlines your four stages for registering a VAT return.

What is VAT?

VAT is a type of indirect tax levied by the government on almost all services and products. It was established on January 1, 2018 at a rate of 5% to assist the UAE government in reducing its reliance on oil and other hydrocarbons as an income source.

The Federal Tax Authority (FTA) divided VAT into three categories by Federal Decree-Law No. (8) of 2017 on Value Added Tax: the 5% standard rate, exempt, and zero-rated.

In the UAE, entertainment, electronics, hotel services, food and drinks, utility bills, private transportation services, school uniforms, commercial rent, vehicles, jewellery, and other industries are all subject to a standard rate of 5% VAT. Suppliers that manufacture these types of products and services must register with the FTA and file a VAT return with the authority at the end of each tax period. This is required for enterprises with annual taxable supply and imports above AED 375,000. Those who have taxable supply and imports totalling more than AED 187,500 per year can register for VAT in the UAE. Please keep in mind that industries eligible for zero-rated VAT are not the same as those qualifying for VAT exemption in the UAE. Let’s look at the distinctions between the two categories.

THE FTA is in charge of VAT in the UAE

By Decree No. 13 of 2016, the Federal Tax Authority (FTA) was formed under Federal Law. The authority is in responsible of handling and collecting federal taxes and related fines, as well as distributing tax-generated funds and enforcing UAE tax laws.

His Highness Sheikh Maktoum bin Mohammed bin Rashid Al Maktoum, Minister of Finance, is the authority’s Chairman, while His Excellency Khalid Al Bustani takes over as Director General after serving as Assistant Undersecretary of International Financial Affairs at the Ministry of Finance for more than 37 years. FTA will collaborate with the Ministry of Finance in order to accomplish economic diversification in the UAE, with an emphasis on non-oil earnings. It will seek to improve the UAE’s financial stability by providing information and help to businesses and consumers to ensure that they satisfy their obligations and fully comprehend the country’s taxes system.

Exempted VAT and zero-rated VAT are not the same thing. In the UAE, zero-rated VAT implies you must charge your consumers 0% VAT. VAT exemption means you don’t have to charge VAT.

VAT is slated to begin on January 1, 2018, and will be charged on some products and services. The law does, however, provide a few exclusions including zero-rated products and services. The FTA has established separate VAT rates for certain industries.

Zero Rated Supplies under VAT in UAE

In Article 45 of the Decree Law, zero-rate supplies are particularly stated. These are the details:

  • Educational Services

If the curriculum is recognised by the Ministry of Education or another competent body, educational services will be classified as zero-rated. The institution must be owned by the federal or local government or receive more than half of its funds from the government. Such institutes will also receive free printed and digital reading materials. Extracurricular activities that are charged must not be free.

  • Health care Services

Healthcare will be provided at no cost. It comprises therapeutic services as well as preventative therapies for the beneficiary. The Ministry of Health licences the healthcare body or institution, doctor, nurse, technician such as radiologist, dentist, or pharmacist to provide healthcare. Holiday accommodations and discretionary cosmetic treatment not prescribed by a doctor are not included in healthcare services.

  • Residential Building

Orphanages, nursing homes, rest rooms, and housing for the military forces and police are examples of residential buildings designed to be occupied for human habitation for residential purposes. A hotel, motel, bed and breakfast, or hospital will not be considered a residential structure for the purposes of the zero rate. A modest dwelling that is utilised as an office or business by its residents is considered as a residential structure for tax purposes.

  • Buildings which are constructed for the use for charity in particulars

Buildings specifically intended for charitable purposes are exempt from the tax.

  • Direct Exports

Exports made directly the cost of transporting goods to a location outside the implementing state is zero. The exporter keeps commercial proof of export (airway bill, bill of lading, consignment note, and certificate of shipment). Goods delivered to a specified zone are not considered exports. Services given to a receiver who does not have a place of abode in the implementing state and who does not receive services directly related to real estate located in the state must be charged at zero percent.

  • Export of Telecommunication Services

Telecommunication services are exported when they are provided by the implementing state to a supplier who lives outside the state and the service is provided outside the implementing state.

  • International Transportation Services for Goods and Passengers

International Transportation Services for Goods and Passengers from one part of the state to another, and vice versa. It also comprises commodities delivered by an aeroplane or ship for consumption or sale, as well as services provided during the conveyance of services. It also includes postal stamps produced by the Emirates Post Group, but only when they are used to convey products outside of the country.

  • Specific means of transportation

Certain modes of transportation, such as commercial aeroplanes, ships, buses, and trains, will be free of charge for the movement of products and services but not for enjoyment, pleasure, or sports. Services for operating, repairing, and maintaining the same vehicle are likewise exempt.

  • Precious Metals supply

The import or supply of precious metals for investment purposes will be tax-free. Gold Platinum should have a purity of 99 percent or above and be traded on the global bullion market.

From the foregoing, we may deduce that all commodities or services relevant to the common welfare of society and human beings have been retained at zero percent. However, I notice one issue with using Input Tax. The credit will continue to accumulate in his account because the products or services delivered are tax-free, and Input Tax Credit is permitted. As a result, the beneficiary of zero-rate goods or services must claim an Input Tax Credit refund.

Exempted VAT in UAE

VAT exemption refers to goods and services that are not subject to VAT in the UAE, as well as corporate organisations that are not subject to value-added tax. When a product is VAT-free, it means:

  • VAT cannot be charged on the prices of exempted products sold by businesses.
  • No sales records for VAT-free items are required.
  • VAT on these exempted products purchased cannot be recovered.
  • A business’s VAT taxable turnover does not include the sale of VAT-exempt items.

Businesses may be deemed partially VAT exempt under specific circumstances. It indicates that a business has registered for VAT yet sells both taxable and exempted items. VAT incurred on the sale and manufacturing of VAT-exempt items might be claimed by such businesses. To avoid fines, a professional organisation should provide VAT consultation services to such a company.

Only four things are free from VAT, according to Article 46 of Federal Decree-Law Number 7 of 2017, as explained below:

  • Financial services that are not provided for a fee or in exchange for a return.
  • Residential Structures
  • Undeveloped Land
  • Local Passenger Transportation Services

Difference between Zero Rated and Exempted VAT in UAE

Businesspeople in the UAE frequently misunderstand these two phrases since they sound similar but have quite distinct meanings. Exempted VAT refers to items and services that are not subject to VAT, whereas Zero-Rated VAT applies a VAT rate of 0% instead of 5% to taxable goods and services. Here are some more noteworthy distinctions between these two terms:

EXEMPT VAT

ZERO-RATED VAT

VAT is not charged on the products and services offered or acquired in this category. The taxable products and services in this category are subject to a 0% VAT rate rather than a 5% charge.
A vendor that sells exempted VAT items is unable to claim input tax. The seller might claim input tax on relevant goods and services charges in this situation.
This does not count as taxable income. This is included in the taxable revenue.
If your company solely sells exempt products and services, you won’t be able to register for VAT. The firm must register for VAT if the value of the taxable products and services exceeds the threshold.
Because the firm cannot claim the tax, there is no need to preserve certain paperwork. The company dealing with zero-rated items must maintain all transaction documentation as proof.

When it comes to VAT and taxation in the UAE, make sure you have all of the details straightened out and your business model confirmed so you can follow all of the rules and regulations. To classify your business and services as exempt or zero-rated, you’ll need to contact a skilled VAT adviser. Otherwise, you’ll have a lot of issues when it comes to submitting taxes and returns.

Because the value-added tax laws in the UAE are relatively new, it is important to consult with a VAT specialist to guarantee compliance with the FTA’s rules and regulations and avoid penalties and legal implications.

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