Difference Between Zero Rated and Exempt VAT in UAE

Under UAE VAT law, zero-rated VAT applies to taxable supplies that are subject to VAT at a rate of 0%. In such cases, the supplier does not charge VAT on the value of the goods or services exported. However, under zero-rated supplies, suppliers remain eligible to recover input VAT incurred on related purchases. This article thoroughly details the difference between zero rated and exempt VAT in UAE. 

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:

• Exporting of services and products to non-GCC implementing states nations.
• 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.
• Services or goods of international passenger transport.
• 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)
• Educational services of accredited institutions for accredited curriculums.
• Medical services provided by recognized experts for preventive and vital treatments.
• 99% and higher purity investment-grade metals such as gold and silver.
• New retail property sold within three years of completion date.

More still, exempt VAT refers to supplies completely exempted for VAT, and more significantly, suppliers of exempt supplies or goods cannot reclaim input VAT on any acquisitions relating to that supply. It places a cash burden on businesses that trade heavily in exempt supplies since they bear the full burden of the VAT on their business inputs such as rent, utility charges, and professional fees.

Also Read: VAT Rate Lists in UAE

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, i.e., there are no buildings or construction when sold.
• Sale or rent of a residential property subsequent to the first supply.
• Domestic passenger transport (includes flights that are within UAE)
• Local passenger transport, such as metro services, taxis, and buses.
• Residential leasing, except the first sale within three years, which is zero rated.
• Financial services such as issuing loans, interest income, and life insurance products.

Exempt suppliers of goods and services are also exempted from VAT registration except that they both supply taxable supplies and their value is above the threshold. Secondly, input tax arising on supplies made under exemption cannot be reclaimed from the FTA, thereby increasing the cost of carrying out such businesses.

Zero Rated and Exempt VAT in UAE: The Main Difference in Accounting and Reporting Implications

For VAT registered companies, the difference between zero rated VAT and exempt VAT in UAE has a bearing on VAT return filing as well as on invoice management directly. Such zero-rated supplies are to be declared under the VAT return in the category of ‘zero-rated supplies,’ and businesses will be required to keep proper records for supporting 0% treatment. Such records enable input VAT to be reclaimed on acquisition for such supplies.

On the other hand, exempt supplies are recorded on a different section of the VAT return and won’t be used to finance recovery of input VAT. In the event that an enterprise both makes exempt and taxable (including zero-rated) supplies, then it will have to apportion input VAT by way of taxable to total supplies and this is what is termed partial exemption.

1. Registration Requirements and Thresholds

UAE companies are required to register for VAT if they make taxable supplies above AED 375,000 in a 12-month turn-over period. Zero-rated supplies are included in the total, and therefore even companies selling solely zero-rated goods or services might be compelled to register and file VAT returns.

2. Implications for Input VAT Recovery

Input VAT is VAT that a business pays when it buys goods and services in order to continue its business. Such VAT can be recovered from the FTA, unless the business has exempt supplies.

Under zero-rated transactions, companies do not pass on VAT to customers but recover all input VAT. Non-exempted companies, however, have to bear the cost of VAT on purchases, perhaps leading to higher prices to be able to maintain profitability.

Seek the Expert Services of Premier VAT Registration in UAE

The majority of businesses in the UAE engage in both standard-rated, zero-rated, and exempt supplies, classifying them as mixed supply entities. Thus, businesses are advised to ensure due diligence when claiming input VAT. The FTA allows such entities to apply an input tax apportionment method, whereby only a proportion of VAT incurred on general expenses attributable to taxable activities may be recovered. To accurately determine taxability and ensure full compliance with UAE VAT regulations, it is advisable to engage premier tax professionals, such as VAT Registration in UAE. Contact us today, and we shall be glad to assist you.

FAQs for Difference Between Zero Rated and Exempt VAT in UAE

Q1. What is the prime difference between zero-rated and exempt VAT in UAE?

The prime difference is that although zero-rated supplies are 0%, companies can recover input VAT on ancillary costs, exempt supplies are zero-rated for VAT, yet companies cannot recover input VAT and thereby incur a higher cost of operation.

Q2. Only exempt supplier companies need to register with VAT, are you?

No. Only companies with exempt supplies do not need to register for VAT since they neither receive VAT nor file VAT returns. Companies with exempt and taxable supplies, however, must register and be liable to VAT rules.

Q3. Can a company with zero-rated and exempt supplies recover input VAT?

Partially, yes. The companies that produce both zero-rated and exempt supplies are required to apportion input VAT on a portion of taxable activities. They can recover VAT levied on taxable (including zero-rated) supplies only.

Q4. What can happen to a company due to misclassifying zero-rated and exempt VAT?

Misclassification results in fines, VAT audits, and loss of finance. If the business incorrectly accounts for VAT repayments on zero-rated supplies as exempt, it can reclaim the VAT, in addition to fees from the Federal Tax Authority (FTA).

Q5. Which industry sectors usually have both zero-rated and exempt VAT supplies?

Areas like healthcare, education, property, and finance service generally have exempt as well as zero-rated supplies. For example, a hospital that provides life-saving procedures (zero-rated) and cosmetic procedures (standard-rated) and has to be diligent in the categorization of its transactions to remain VAT-compliant.

Also Read: VAT Late Payment Penalty in UAE