The word tax has not been specifically defined under any Law, however it simply means compulsory extortion of money by any Government within Constitutional power of the Country. Imposition of tax is necessary for States to collect money for its development activities, sovereign functions and meeting other sovereign objectives. The types of tax systems prevalent across the world are “Direct Taxes” and “Indirect Tax”. Direct Tax, also called as “Corporation Tax”, means the tax which shall be paid by the person on whom it is levied. Indirect Tax is tax levied on the goods or services rather on income of a person. Indirect tax means the tax which is paid by the person other than the person on whom it is levied.
Meaning of VAT
VAT simply means Indirect tax on the domestic consumption of goods and services, except those that are zero-rated (such as food and essential drugs) or are otherwise exempt (such as exports). It is levied at each stage in the chain of production and distribution from raw materials to the final sale based on the value (price) added at each stage. It is not a cost to the producer or the distribution chain members, and whereas its full brunt is borne by the end consumer, it avoids the double taxation (tax on tax) of a direct sales tax. Introduced by the European Economic Community (now the European Union) in the 1970s.
Legal enactment of VAT in UAE:
In line with the said Economic Agreement 2001, based on the decision of Supreme Council of GCC, held in December 2015, and keeping in mind the uniformity in imposition of VAT by the GCC States, the decision to establish a unified legal framework for the introduction of a general tax on consumption in the GCC known as VAT was made. Such agreement is termed as “Common VAT Agreement of the States of the Gulf Cooperation Council (GCC)”, and commonly called as ‘Unified VAT Agreement’ or ‘GCC VAT Framework’.
The GCC Framework contains 15 Chapters consisting of 78 Articles covering different aspect starting from definitions, scope of tax and supplies, place of supply, tax due date, calculation of tax, and value of supply so on. The Framework Agreement provides for various tax treatment of different types of transactions in different circumstances. Though the Framework Agreement covers most of the aspects of VAT law to be implemented in GCC countries, th final law to be implemented by the respective countries will be formulated by them an adopted. In lien with understanding of framework, ‘United Arab Emirates’ & ‘Kingdom of Saud Arabia’ has already finalized their VAT law, whereas other member states are yet to come u with their respective laws. It is expected that other member states will impose the VAT law i the year 2019-2020.
Merits of VAT
Introduction of VAT in UAE:
The United Arab Emirates is a federation of seven emirates which included emirate and local government. The United Arab Emirates does not have any federal Income Tax. The UAE Government implement the VAT (Value Added Tax) in the country from 1st January 2018 with a standard rate of 5%, that too on destination taxation based principal, i.e tax will be levied based destiny of goods or services. That is what the reason the Exports are tax free while Imports are treated at par with domestic products and services.
Factors Leading to introduction of VAT on the basis of GCC:
The core principles of VAT Law in UAE are drawn from Sharia Law, most of the legislations are comprised of a mix of Sharia and European concepts of civil law. The principles of Sharia Law are applicable to business transactions and have influenced the development of the commercial code. These principles have influenced the drafting and interpretation of laws in the UAE.
Five Core Principles of Sharia Law:
Features of UAE VAT:
√ 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 made by him in the state (as per place of supply) exceed compulsory registration threshold of AED 375,000 in preceding 12 months.
√ A business may choose voluntarily to register under VAT if their taxable supplies and imports are less than the registration threshold, but exceed the voluntary registration threshold of AED 187,500.
Zero- Rated Items in UAE VAT law:
VAT will be charged at 0% on the following categories of supplies, but corresponding input tax may be recovered and claim as refund:
Exemptions under VAT Law:
Variants of VAT:
VAT is divided into three variants such as gross product variants, income variants and consumption variants. They are distinguished on the basis of their methods of calculation, addition method, invoice method and subtraction method.
1. Gross Product Variants :
2. Income Variant :
3. Consumption Variant :
Methods for Computation of VAT:
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Author of this article is CA Deepak Bharti who is member of ICAI and can be reached at [email protected]. Suggestions/comments are most welcome.