When charging Value Added Tax or VAT in UAE, rates that are charged greatly depend on what the products or services are. The majority of items in the country are subject to five percent VAT, which is currently the standard rate. However, there are two other categories: VAT-exempt and zero rated VAT.
These two categories often cause confusion to business owners as they seem like they’re one and the same. They actually differ from each other as they differ in their treatment in terms of accounting. We will focus on them for this article in order to help you avoid getting penalized for errors in VAT accounting and reporting.
VAT-exempt and Zero-rated VAT
The easiest way in explaining how zero rated VAT differs from VAT exempt is by comparing the two categories.
What is zero rated VAT in UAE?
Goods and services that are categorized as zero-rated for VAT purposes are still goods that are taxable. However, the rate for VAT is charged at zero percent. Goods and services which fall into this category are as follows:
- Export of products and services that are outside any GCC implementing state
- Investment jewelry, platinum, silver, and goal with greater than ninety-nine percent purity and tradable in the global markets
- The first sale of a charitable real estate or building
- First sale or rent of a residential property after the completion of the conversion or construction
- International transportation of goods and passengers including intra-GCC
- Supply of products and services that are related to their means of transport, including transportation of products and passengers
- Supply of means of air, land, sea transport for commercial transport of products and passengers of over ten people
- Natural gas and crude oil
- Medical equipment and medicines that are not listed in the Cabinet Decision
- Healthcare or medical services that are aimed at treatment for residents including dental services
- Preventative healthcare services (includes vaccinations)
- School trips where the purpose is within the curriculum and educational
- After school activities that are supplied by teachers without any extra charge
- Preschool education and nursery education
- Higher education that is provided by an institution which is owned by the UAE government or fifty percent funded by the local government, including all the related products and services Public and private school education with the exemption of higher education (includes all related products and services with are provided by the educational institution)
What is VAT exempt in UAE?
VAT exempt products and services aren’t taxable. No VAT should be charged. Goods and service falling into this category are as follows:
- Life reinsurance and life insurance
- Issue, transfer, or allotment of a debt security or equity
- Interest on any kind of lending including credit cards, loans, and finance leasing
- Margin based products that don’t have a commission, discount, rebate, explicit fee, or similar
- Bare land
- Sale or rent of a residential property subsequent to the first supply
- Domestic passenger transport (includes flights that are within UAE)
So, how do the two categories differ?
A business that sells goods and services which fall in the category, zero-rated for VAT purposes, will be able to benefit from VAT registration and being a business that’s registered for VAT. This is due to how it should deal with both output and input tax:
- VAT a business pays on products and services which it purchases is called input tax
- When a business that’s registered for VAT charges VAT for a taxable sale, it’s referred to as output tax. Businesses essentially collect the VAT that is paid by customers then pass the amount collected to the Federal Tax Authority when it pays the VAT bill during the tax return filing.
Read also: How To Reduce VAT Penalties In UAE
This has a crucial effect on the VAT return of the business:
- If a business is registered for VAT and it pays more VAT for goods and services which it purchases than It gets on sales, this particular business will be able to reclaim the difference for what it’s paid as well as what’s been collected.
- For a business that is registered for VAT and collects more tax on the sales rather than pays on goods and services that are for the business, this particular business has to pay to the FTA the difference.
The crucial thing to remember is the fact that items considered as zero-rated don’t incur a charge as VAT is at zero percent. When a business is only selling zero-rated items, the VAT that is paid on items it purchases will be more compared to the VAT that it collects from its clients or customers. The business will be able to claim this difference from the tax authority.
If you want to know more about the local tax regulations in UAE, talk to the regulated tax agents of VAT Registration UAE today!