Difference Between Zero-Rated VAT and Exempted VAT

Apr 2019

The Value Added Tax was implemented with a rate of 5% in UAE from 1 January 2018 with an idea to bring in a new source of revenue. Since its implementation, the businessmen are still trying to cope up with the new rules and regulation regarding VAT and are still confused between Zero-Rated VAT and Exempted VAT. The main reason for their confusion is that both the terms sound the same but mean different things.

The below article will help you to understand VAT and its implications and also assist you in understanding the differences between Zero-Rated VAT and Exempted VAT.

What is VAT?

Value Added Tax or VAT can be described as an indirect tax levied on the domestic consumption of goods and services. The exemption to these goods and services are goods that are zero-rated or goods that are exempted. This tax is added at each stage of the supply chain. The Value Added Tax is a consumption tax as this tax is ultimately borne by the customers.

According to the nature of the supplies, VAT can be divided into three types

1. Taxable

The goods and services that are taxable are subject to a flat rate of 5% VAT. The government has decided upon a list of taxable goods and services. The rest goods and services are zero-rated or exempted.

2. Zero Rated

When the goods and services are exported to any Gulf Cooperation Council (GCC) country that has not implemented VAT, in this case, the aforementioned goods and services are subject to 0% VAT. This would include any goods or passengers being transported internationally or any kind of transfer that would even cross UAE or part of it.

To make this more understandable we can say that a zero-rated VAT is a supply of good and services where they are taxed but at a rate of 0%.

Goods and Services under Zero Rated Tax

Article 45 of Federal Decree-Law Number 8 of 2017 states that there 14 goods and services that are subject to zero-rated VAT. These are:

Direct or Indirect exports
International Transport
Air Passenger Transport
Supply of Air, Land and Sea Means of Transport
Goods and Services related to the Supply of Means of Transport
Aircraft and Vessels of Rescue
Supply of Goods and Services related to the Transfer of Goods and Passengers
Investment in Precious Metals
Sale of Residential Building
Charitable Building Supplies
First Supply for Residential Building
Oil and Gas
Educational Services
Healthcare Services

3. Exempted

Some goods and services will not be charged any VAT. They will incur no input charge, No output vat charge and no tax invoices. There is no implication of VAT in the case of these goods and services.

The Goods and Services under Exempted category

There are only four items which are listed as exempted from VAT as per Article 46 of the Federal Decree-Law Number 8 of 2017. These are:

Financial Services that are specified in the decree mentioned above
Supply of residential buildings through sale or lease, other than that which is zero-rated according to Clauses (9) and (11) of Article (45) of this Decree-Law.
Supply of bare land.
Supply of local passenger transport.

Difference between Zero-Rated VAT and Exempted VAT

It is often that the businessmen are confused by the terms Zero-Rated VAT and Exempted VAT. Both of the terms may sound similar but have very different implications and results. The differences between them are given below:

Zero-Rated VAT	Exempted VAT
Here the taxable goods and services are subject to VAT at a flat rate of 0% instead of the standard rate of 5%	In such a case, VAT is not applied at all on the goods and services.
A Non-VAT vendor cannot make a zero-rated supply	These are similar to the supplies made by the non-VAT vendor but are not taxable.
In this case, the vendor can claim input tax deductions on the related expenses of the goods and services.	A vendor can’t claim any input tax deduction if the vendor has not made any exempt supply.
This will form the part of the taxable turnover	This will not be a part of the taxable turnover
If the values of the taxable goods are above the specified threshold, the vendor must register for VAT	If the vendor only makes the exempt supplies, he cannot apply for registration as he won’t qualify
The vendor must document all his transactions for proof	This does not need any special documentation as the vendor can’t make any claims for tax.

You must get all the facts clarified, and the business model verified beforehand so that you remain updated and notified with the rules and regulations, and the different requirements for the business so that it would be a successful endeavour and would also help in planning out the future of the business. It is better to hire a professional consultant to categorize your services under zero-rate or exempt; otherwise, you may face problems regarding the filing of taxes.

We at JAXA can help you regarding all your VAT and Tax related queries and will help you to grow your business without any hindrances. We also provide a range of other services such as Audit and Assurance Services, Tax Services, etc. In case of any query related to the services we provide, please contact us, we’d be glad to assist you.