All You Need to Know About VAT – Are You Prepared?
27

Jan 2020

We all know that the United Arab Emirates has copious amounts of reserves of oil and gas and have a very flourishing Hydrocarbon industry. Except for Dubai, the country of UAE is heavily dependent on revenue from the oil and gas sector. The hydrocarbon sector plays a considerable role in the economy of the UAE. In the year 2009, more than 85% of the economy of the country was centred around the revenues from oil exports.

Seeing this, the government of the UAE has made its goal to reduce its dependence on the hydrocarbon sector and is gradually working towards the goal. The UAE is already considered as one of the most diversified countries among the Gulf Cooperation Council Countries. In its efforts to diversify the economy more, the government of UAE has implemented Value Added Tax (VAT) in the UAE.

Let us know about VAT which will help you understand how prepared are you for the Value Added Tax.

Value Added Tax

The UAE government introduced value Added Tax on the 1st of January, 2018. The rate of the Value Added Tax is decided upon 5%. This is a low rate, and it may feel that there will be no significant effect on the economy with such small percentage of tax, but this tax of only 5% will help in increasing the entire economy of the country by almost 2%. As the country has virtually no taxation, this 5% increase in taxes will help a lot in establishing a separate source of revenue for the country.

The Value Added Tax will be levied on companies based on the value-added to a product on each stage. For, E.g. let us suppose the cost of a kind "X" is ten units. If this good is then converted into some other good "Y", the cost of the right "Y" will be the cost of the good of "X" and the Value Added Tax added to it as the good "X" has been converted to good "Y" after a process. If this good “Y” is further converted to a good “Z”, the cost of the said good would be equal to the value of the good "Y" with addition to some percentage of the price of the conversion process.

The idea of Value Added Tax is not a new one and is followed by almost 180 countries. Value Added Tax is considered as a Consumption Tax meaning that these taxes are based on the consumption of the goods or services by a consumer. These taxes are mostly indirect taxes such as a value-added tax or a sale tax.

Vat Registration

It is imperative to know who needs to register for VAT and who can exempt the registration because vat applies to all the companies in the UAE. For the ease of the companies that are set up in the country, the government has divided the registration process into three parts:

1.Compulsory VAT Registration

The companies in the UAE which have a revenue of AED 375,000 or more have to compulsorily register themselves for VAT registration, as mandated by the Government of UAE.

2.Voluntary VAT Registration

The businesses that are set up in the UAE and generate a revenue of AED 187,000 or more can register themselves for VAT, but there is no such compulsion. It is always recommended that a company expresses itself for VAT if possible as this will boost the confidence of the client and will also ensure a hassle-free future.

3.Exempted VAT Registration

  A business which generates a revenue of less than AED 187,000 in the UAE does not need to register itself for VAT.

Effects of VAT

The implementation of the Value Added Tax will initially cause a bit of confusion between both companies and individuals. The companies will be confused as they will not completely figure out what are the extra procedures to be done and how will any decision relating to the Value Added Tax will affect the company. Similarly, the consumers will see a rise in the cost of products at the initial stage of the product which will cause a bit of commotion among them, but in the long run, the Value Added Tax will help them and the country in many ways.

The implementation will be a significant reason for the creation of new business opportunities and jobs. The 5% increase will not affect the consumers much, and the extra amount paid by them will be utilized by the government to provide better amenities to the residents of the country. Also, the main aim of the diversification of the economy and not depending on a single source of revenue will be achieved.

There will be massive growth of auditing and accounting firms in UAE as the companies will have to keep accurate and extensive records of all the business transactions. These financial firms will help to keep all the documents and allow the management of the company to focus on other important matters.

Availing the VAT-related services which are provided by JAXA Chartered Accountants is a perfect option. JAXA is a reputed auditing firm and can offer you service both in mainland and free zones. This firm is approved by free zones such as Dafza, Jafza, Dmcc, Shams, and many others. For more details, Contact Us. We will be glad to be of service.