Value Added Tax (VAT) and Sales Tax are both consumption taxes implemented across the world. However, there are key differences in how each system operates and how VAT and Sales Tax differ in the United Arab Emirates. This article explores the contrasts and similarities between the two tax regimes in the UAE.
What is Value Added Tax in UAE?
Value Added Tax (VAT) is a consumption tax implemented in the United Arab Emirates (UAE) since January 1, 2018. Here are some key points about VAT in the UAE:
- VAT rate in the UAE is 5% applicable to most supplies of goods and services. Certain essential items like residential properties, healthcare, and education are zero-rated or exempted.
- It is a multi-stage tax that is collected at each stage of the supply chain – from production to the point of sale. Businesses that are VAT-registered are required to charge VAT on their taxable supplies.
- Both business-to-business (B2B) and business-to-consumer (B2C) transactions within the UAE are subject to VAT. Imported goods are also taxed.
- Registered businesses can reclaim or offset the input VAT paid on expenses against the output VAT collected from customers. This feature prevents double taxation.
- VAT collected must be remitted to the Federal Tax Authority (FTA) of the UAE on a quarterly or monthly basis depending on the business’s annual turnover.
- The FTA is responsible for VAT registration of businesses, determination of taxable supplies, collection of tax returns, and overall enforcement of VAT laws across the UAE.
What is Sales Tax UAE?
Sales tax is another type of consumption tax placed on the sale of goods or services.
Some key points about how a sales tax system would differ in the UAE:
- Sales tax is a single-stage tax applied only at the final point of sale, usually from a business to the end consumer. It is not collected at each stage of production and distribution like VAT.
- Only B2C transactions would be subject to sales tax, not B2B ones. This reduces the compliance burden compared to VAT.
- Sales tax rates can vary by product or jurisdiction. There is no single harmonized rate like the 5% VAT rate in the UAE.
- Businesses are not able to reclaim any sales tax paid on purchases and inputs. This cascading effect makes goods and services relatively more expensive compared to VAT.
- Enforcement may be more difficult as sales tax obligations arise only at the final point of sale. It requires tracking of B2C transactions specifically.
- Collection and remittance to the government would likely occur less frequently than the quarterly/monthly VAT filings in the UAE. Perhaps annually or biannually.
Table: Difference between VAT and Sales Tax in the UAE
| Criteria | VAT | Sales Tax |
|---|---|---|
| Rate in UAE | 5% on most goods and services | No sales tax currently in UAE |
| Stage of collection | Collected at each stage of the supply chain i.e. production to point of sale | Collected only at the final point of sale |
| Transactions covered | B2B and B2C transactions | Only B2C transactions |
| Input tax credit | Registered businesses can claim input tax credit/reclaim VAT paid | No input tax credit allowed, results in tax cascading |
| Tax base | Broader as it covers both B2B and B2C | Narrower only covering B2C transactions |
| Compliance requirement | Quarterly/monthly tax returns filing for all registered businesses | May require less frequent returns like annually for smaller businesses |
| Administering authority | Federal Tax Authority of UAE | Federal Tax Authority would administer if sales tax introduced |
| The rationale for selection in UAE | International compliance, fewer distortions, wider tax net | Not selected due to advantages of VAT system |
Why did the UAE choose VAT over Sales Tax?
The UAE government examined both VAT and sales tax models before selecting VAT for the following key reasons:
- International compliance: VAT is a globally recognized tax used by over 160 countries including all GCC neighbors. It aids consistency for cross-border trade.
- Avoids tax cascading: By allowing input tax credit or VAT reclaims, it eliminates double taxation that occurs under sales tax due to taxes paid at each stage of production and distribution being embedded in final prices.
- Broader tax base: VAT applies to business transactions in addition to consumer sales, widening the pool of taxpayers. This improves revenue generation potential compared to sales tax.
- Administrative ease: The quarterly/monthly VAT returns provide real-time tax collection visibility for the authorities versus annual/biannual lumps under sales tax.
- Higher compliance: VAT registration is mandated for businesses above a certain turnover threshold versus voluntary compliance under simplified sales tax regimes.
FAQs
Q1. What is Value Added Tax (VAT) in UAE?
A: VAT is a 5% consumption tax applied on the supply of most goods and services in the UAE, which businesses collect from customers and remit to the tax authority. It replaces earlier trade and customs duties.
Q2. Is there a Sales Tax in the UAE?
A: No, the UAE does not have a sales tax system currently. It implemented VAT from January 2018.
Q3.How does VAT differ from Sales Tax?
A: Key differences are that VAT is applied at multiple stages, while sales tax only at final sale. VAT allows tax credits for businesses, sales tax does not. VAT has a broader tax base including B2B.
Q5.Why did the UAE choose VAT over Sales Tax?
A: VAT was selected for greater international compliance, elimination of double taxation, wider tax base, better administrative controls and enforcement.
Q5. Can businesses reclaim VAT in UAE?
A: Yes, registered businesses can reclaim or offset the input VAT paid on expenses against the output VAT collected from customers. This feature of VAT prevents double taxation.
So in conclusion, the transparency, efficiency, and harmonization benefits associated with VAT UAE outweighed a potentially simpler sales tax system from an implementation perspective for the UAE economy. Businesses operating in the UAE should consider seeking the guidance of VAT consultants UAE to streamline their operations and ensure compliance with VAT obligations.
Regulated Tax Agents in UAE
Taxation can be complex, especially if you try to keep up with the changes made to tax regulations. If you want to ensure compliance, then call us today as we can help you with all your tax-related needs, requirements, and obligations.
