In our daily life, whenever we buy goods or avail any kind of service, we need to pay up Value Added Tax (VAT) on them. Have you ever thought why do we need to pay an extra amount even after paying the mentioned amount for a product or a service? Why is this concept accepted internationally?
Well, let’s have a look at what VAT, VAT accounting is all about and why is it essential.
Value Added Tax (VAT) is a consumption tax that is levied on the use of goods or services and is considered as an indirect tax which means that it is to be paid by the ultimate consumer. Now when it comes to the business front, there exists a receivable Value Added Tax and Payable Value Added Tax. The VAT collected through the sale of goods are to be paid to the government. On the other hand, the VAT paid while purchases can be received from the government. The concept of Value Added Tax has been accepted and applied by almost 150 countries all over the world.
The different types of VAT are:
1. Input VAT
Input VAT is charged when any goods are purchased or services are rendered; and if a buyer is registered with the VAT tax authorities, they can deduct the amount from his/her settlement.
2. Output VAT
The output VAT is directly calculated and charged on the sale of goods and services delivered.
VAT accounting is an accounting process that deals with understanding how much VAT the business needs to pay up and the other important questions related to the Value Added tax of a business entity. It becomes essential for every taxable person to maintain a book of records under UAE Tax Law for at least the previous 5 years of the business. These accounting records should be detailed so that every business information can be extracted from them whenever required. It also helps to identify the amount of consumption tax that needs to be paid on time, helps in lowering the tax burden and maintenance of such records have become a mandate at a global level.
VAT Accounting in UAE
The UAE, a part of GCC countries, has agreed on the principle regarding the implementation of the VAT. The GCC countries have signed an agreement known as the Unified VAT Agreement (UVAT) which guides the jurisdiction regarding the implementation of VAT. An added benefit behind the acceptance of this concept was to dilute the dependency of the entire country on oil and other hydrocarbon products and focus on different sectors. This gave birth to VAT Accounting in UAE and is also considered as another source of revenue. The proposed rate of VAT in the UAE is 5% initiated on 1st January 2018.
Classification of UAE VAT
There are 3 kinds of VAT rates in the UAE:
1. Standard Rate
Most of the goods and services have been taxed at the standard rate of 5%. These include electronic items, automobiles, fuel, jewellery, food & beverage, apparel, entertainment services, cosmetics, restaurants & hotels, commercial leasing, construction, etc.
2. Zero Rate
For certain categories of goods and services, VAT is charged at zero rates, i.e., such items are taxable but with a zero rate. Items under this bracket include export of goods or services, international transportation of goods and passengers, supply of certain means of transport, supply or import of investment precious metals (of 99% purity or more), residential buildings, buildings used by charities, certain education services, and certain healthcare services.
VAT is not applicable for goods and services falling under this category. It includes financial services, certain residential buildings, bare land, and local passenger transportation.
VAT Registration in UAE
Any business whose taxable supplies and imports exceed AED 375,000 must register for VAT. Voluntary registration is also applicable if the amount exceeds AED 187,500. Each individual or business entity is provided with a Tax Registration Number (TRN) which consist of 15 digits.
Essential Documents for VAT Accounting
Any business needs to submit a set of documents in order to initiate the process of VAT Accounting. The set of essential documents includes:
- Record of all supplies and imports of goods
- Tax credit notes and alternative documents
- All tax invoices
- Reports of goods exported
- Taxable supplies received or made
- Due on tax supplies
- Recoverable tax supplies or imports
Apart from these, the Federal Tax Authority (FTA) can also ask for certain details like Annual Account details, General Ledgers, VAT Ledgers, Purchase daybooks, Invoices issues, Credit and Debit notes, etc.
Penalty for Not Keeping Proper Records
An individual or business who fails to keep a track of proper records needs to submit a penalty of AED 10,000. If the offence is repeated again, a sum of AED 50,000 needs to be paid.
Benefits of VAT Accounting
You have got a clear idea of what VAT is all about and its types. The question that might linger in your mind is why is VAT accounting important? The answer is as below:
Easy Tax Returns
By performing VAT accounting, a company will be able to access all the necessary documents relating to tax filing at a single place which would greatly ease the process of filing the tax return of the company.
In case a company decides to expand it, vat accounting would provide the estimated total amount that has to be paid in the form of taxes. The management of the company can go through the VAT accounting report, and according to the set budget, it can decide to expand the business.
Tracks of VAT records
VAT accounting allows the company and the concerned authorities to check whether all the tax-related documents are submitted or not. It serves as a checklist that consists of the names of the materials to be correctly filled and submitted.
Lowers the Risk of Tax Audit
By utilizing VAT accounting, the company will have the data relating to all the transactions conducted by the company. The chances of a tax audit being conducted by the concerned authorities will be drastically reduced.
Acts as Evidence
In case the concerned authority decides to conduct a tax audit of your company, VAT accounting will help the management to provide all the accurate details of the transactions related to tax done by the company.
Reduces the Risk of Penalties
VAT accounting would see to it that the company is compliant to all the rules and regulations as set by the concerned authority which would reduce the risk of getting penalised by the government. It would also keep updating the VAT accounting procedures with time.
Creates Awareness for VAT Related Schemes
From time to time, the government keeps on bringing new schemes relating to Value Added Tax. VAT accounting would generate alertness among the companies about how the various companies can avail the benefits
Boosts National Revenue Growth
The VAT is a vital tool of revenue generation for a country’s economy. VAT accounting is a process that calculates and registers the total amount of Taxes to be paid by a company, and if not done correctly, there would be huge after effects on the overall economy of the country.
JAXA VAT Compliance Services
JAXA is a business consultancy firm that specializes in providing taxation and accounting services. When it comes to the VAT accounting front, we provide the following VAT compliance services:
- VAT Registration process
- Invoicing and VAT treatment
- Maintaining the book of records
- Looking into the matter of inspection of records
Why Outsource with JAXA?
JAXA has been dealing with the crucial process of accounting and taxation for multiple clients engaged in multiple businesses at a global level and has been consistently performing as one of the top VAT consultants in the UAE. Our experts understand the nature of your business, takes care of your VAT issues and makes it easier to deal with. To know how, do contact us. We’d be happy to assist.
Who is the registrant in VAT?
When a person receives a tax registration number, he/she is called a registrant.
Who issues the Tax Registration Number?
The Tax Registration Number (TRN) is issued by the Federal Tax Authority (FTA).