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May 2020
The tax system in the UAE has witnessed a considerable change in recent years. At first, the country used to have almost no taxes, but to reduce the dependency of the country on the revenue generated by the oil and gas sector and to better the economy and infrastructure of the country UAE Government decided to introduce Value Added Tax (also known as VAT).
The implementation of this Tax is not clear to many of the corporate entities and to simplify the matter this blog will provide all the necessary information which will allow a company to understand the tax scenario in UAE.
Value Added Tax: The Basics
The Value Added Tax was introduced on the 1st of January, 2018 making UAE the second country in the group of Gulf Cooperation Council country to do so. With almost no taxes in the country, the government has opted to implement VAT at a 5% rate. This may feel very low, but at this rate, the Gross Domestic Product (GDP) of the country can rise by almost 2%. The country's government has a vision for the long run and has been building capital buffers and also taken steps to diversify its businesses.
Considered as a Consumption Tax, Value Added Tax is levied on the companies based on an increase in the value of the good or services at the different stages of production or distribution. Value Added Tax is not a very new idea and is implemented in almost 180 countries except the United Arab Emirates. In VAT, the ultimate burden of taxation is borne by the consumer.
Who Needs to File VAT?
The VAT will apply to all the companies in the UAE. Thus it is imperative to understand that who needs to register for VAT and pay how much Tax in the United Arab Emirates. According to the government, all the businesses in the UAE have been divided into three parts.
1.Mandatory Registration
The threshold for compulsory registration has been kept at AED 375,000. It is mandatory for a company to register itself for VAT if its revenue is AED 375,000 or more.
2.Voluntary VAT Registration
If a business generates AED 187,000 or more, the company can register itself for VAT if it wants to. It is not compulsory to register the company, but it is recommended that a company expresses itself if it can as it will increase the confidence of the Investor
3.Exempted from Registration
If a business generates revenue less than AED 187,000, the company does not require to register for VAT in the UAE.
Impact of VAT in UAE
The implementation of the VAT in UAE as helped a great deal in successfully diversifying the economy of the country. It has created a source of income for the country which will be used for the up-gradation of the country's infrastructure and will allow the government to invest in other essential and capital intensive projects.
The implementation of VAT saw an initial rise in the costs of individual products, but in the long run, it will be beneficial for everyone. The application of VAT will create new business opportunities and new jobs. The middle class may feel a sting as there will be an increase in the standard goods, but since the growth will only be of 5%, the pain will be minimal.
The businesses and the entrepreneurs will have to keep a detailed and accurate record of all the transactions and file for VAT accordingly. If there is a mistake in registering for VAT or any small mistake in recording the sales, there may be a significant effect on the bottom-line of the organization. Thus it will be a very prudent step on the part of the management of the business to avail the services of a firm which will provide VAT related services. Not only this, but a company also needs proper bookkeeping and accounting service so that all the transactions are correctly recorded.
If you are looking forward to setting up a business in the United Arab Emirates, you may require VAT related services. One such firm which provides VAT services which will assist your company to grow further is JAXA Chartered Accountants. JAXA is a leader in providing services related to Audit and Accounting, Value Added Tax, and various other services. To know more about the multiple services provided by our Audit and Accounting firm in UAE do contact us – we’d be glad to assist you.