The Government, in any country, has the power to impose Taxes, Duties and other levies upon its subjects. The need for the same is to gather resources for the country’s development activities, sovereign functions and other sovereign objectives. The types of tax systems prevalent across the world are “Direct Taxes” and “Indirect Tax”.
Direct Taxes are directly linked to the income of the persons/entities and collected by the States out of their income. Indirect Taxes are levied on the Goods or Services produced/consumed in the country instead of income or profits of the subjects. The below noted discussion shall be elaborating upon some of the essential features of the newly imposed Value Added Tax (V.A.T.) in the United Arab Emirates (U.A.E).
Essential Features of VAT imposed in the UAE
The Gulf Cooperation Council (G.C.C.) is a regional intergovernmental political and economic union of the Arabic part of the world. UAE is one of the Member States of the GCC. All GCC Countries have agreed to implement the VAT latest w.e.f. 01.01.2019 and in that direction, have already passed the Framework for common law. The Framework unanimously passed by all GCC Countries is on consumption based model of VAT suggesting that tax shall be imposed wherever value is added to the product in its supply chain. The Framework is binding on all Member States who shall design their own VAT Law within it. Federal Decree-Law No. (8) of 2017 on VAT has already been passed by Government making the effective date of VAT implementation from 01.01.2018. Executive Regulations are also issued under the Law, which lay down various rules, regulations and different procedural aspects of the Law.
The essential features of the VAT in UAE are as follows:
- Imposed on Supply of Goods and Services: VAT is leviable on the supply of goods and/or services. The definition of supply of goods or supply of services has been laid down in the Decree Law and further procedures laid down through Executive Regulations. The term “supply of service” is broad enough to cover all such transactions which do not constitute supply of goods. Further, some activities are treated as deemed supply of transactions to bring within the scope of levy of tax.
- Tax on import of goods and services: VAT is also leviable on the import of goods as well as services. The goods and services which would be subject matter of VAT on import will be those goods and services which are liable to tax if such goods were supplied within UAE. Those goods or services are called as concerned goods or concerned services.
- Tax has to be paid by the supplier making taxable supplies of goods or services. In some cases of import of goods, the liability has been casted on the recipient of goods or service, commonly called as Reverse Charge Mechanism. The person liable to pay tax is required to get itself registered under the Law to fulfil all its obligations.
- The Place of Supply provisions have been defined for the “supply of goods” as well as “supply of services”. Tax would be levied in the State (UAE) only when the place of supply falls in the State. In case of supply of goods, the place of actual supply of goods would generally be within States. There are specific provisions for determination of place of supply in case of exports and imports. In case of supply of service, the place of supply shall be the residence of the supplier. In exceptional cases, place of supply shall be location of recipient or place where services are actually performed.
- There are specific provisions for determination of Date of Supply i.e. the point of time when liability to pay tax would arise. Normally it is the date of supply of goods or services or the date of receiving the advances, or date of issue of invoice, whichever is earlier. There are other specific instances to determine the date of supply which need to be observed in those specified cases.
- Each person making supply who has place of residence in the State or in any other implementing states is required to obtain registration if value of aggregate supplies (as specified) made by him in the state (as per place of supply) exceed compulsory registration threshold of AED 375,000/- in preceding 12 months. There is also option to get oneself voluntary registered in the value of supply or expenses exceeds AED 187,500/-. The concept of Tax Group has also been introduced to allow single registration to various entities working in a group.
- There are specific valuation provisions for determination of value on which tax is to be charged. Value has to be determined based on the transaction value. If consideration is partly non-monetary, then monetary value + market value of non-monetary consideration to be taken for determination of value for charging VAT. There are specific provisions supported by executive regulation to deal with discount, value of transactions with related parties, vouchers, profit margin based scheme, deemed supply cases etc.
- Certain sectors have been made zero rated which means resultant tax on supply of zero rated goods would be ‘0’ (ZERO) but corresponding input tax may be recovered and claim as refund. This is done in priority sectors. Exports of goods and services, international transportations of passengers or goods, Supply of means of transportation and related services, investment in precious metals, supply of residential buildings, crude oil or natural gases etc. are few cases which have been made zero rated. The conditions and explanation as to what are all covered therein are explained in executive regulation.
- Exemptions have been granted to few other sectors where person making supplies shall not have right to recover the input tax. These include mainly financial service sector, supply of bare land, local passenger transports, basic healthcare services etc. However, for financial sector in certain cases the input tax credit is extended.
- From the VAT, that the taxable person is liable to pay can be deducted the VAT that is charged to him by other taxpayers. In addition, the person is also entitle to recover the input tax paid under reverse charge mechanism. There are conditions and mechanism for input tax recovery, its adjustment and claiming refund. There is specific scheme for capital assets for recovery of VAT distributed over more than one tax periods instead of full VAT in the year of purchase.
- There are specific cases for output tax adjustment which could arise on account of any event occurring post supply of goods or services. The person may issue credit note for any alterations in the value of supply including in the cases of bad debts which would result in corresponding reduction of liability.
- Tax invoice is very important document in the VAT Law as it records understanding of the parties, all ingredients of supply and applicable tax on such supplies. The tax invoice has to be in the specified format and may be raised either manually or electronically.
- There is detailed requirement for maintenance of records and documents. All taxpayers are required to maintain the account for specified period.
- Transitional provisions have been provided for smooth migration from non VAT regime to VAT regime.
- To deal with the tax procedures related to the administration, collection and enforcement of Tax by the Authority, separate Decree Law Federal Law No. (7) Of 2017 on Tax procedures has been notified. The law provides for concept of tax agent, audit by authorities, assessment, demand, administrative penalties, tax evasion, manner of claiming refund and other relevant aspects.
Conclusion
The VAT Law in the UAE is framed in accordance with the GCC VAT Framework and has been designed considering peculiar economic and social features of the region. The successful implementation of the VAT would largely depend upon the active participation of all stakeholders including government. It is now the responsibility of the businesses in the UAE to get themselves prepared for this landmark change in the way of doing business.
By Advocate Manu Gupta | BBA;LL.B; LLM (Taxation) | Corporate & Taxation Partner | Amethyst Legal
Refrence- BGM on UAE Vat law by ICAI.
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