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Hiregange & Associates
Chartered Accountants
By – CA Madhukar N Hiregange
CA Ashish Chaudhary
All Member States of the Gulf Cooperation Council (GCC) have agreed to implement
the VAT system in unified manner latest w.e.f. 1.1.2019. Few of the countries have
already taken substantial steps and have announced its implementation w.e.f.
1.1.2018. UAE Government has also issued Federal Decree Law on VAT providing
for legal framework on VAT.
Gulf countries mainly depend on revenues generated from extraction and
distribution of oil products i.e. crude oil, gasoline, gas oil, fuel oil, natural gas and
various other hydrocarbons. In the recent years, the price of oil in the world market
has fallen drastically, leading to very low revenue with the government. This can be
seen from the fact that the price of one barrel in the year 2008 was $ 147.54 which
has fallen down to $48.66/barrel in the year 2017. Also, oil being a non-renewable
resource, these countries cannot depend on oil revenue for a longer period of time.
Hence, important purpose of introduction of VAT has been to arrange funds for
social funding of the government.
Implementation of VAT is going to have pervasive effects and cannot be seen in
isolation. One must have knowledge of laws as mentioned below.
Legal Framework of Indirect Taxation in UAE
1. The Unified VAT Agreement for GCC Countries (“Framework”): The
framework agreement has been passed by all Member States of GCC for uniform
imposition of VAT at a rate of 5%. The Agreement aims to establish a unified legal
framework for the introduction of a general tax on consumption in the GCC
known as (VAT) levied on the import and supply of Goods and Services at each
stage of production and distribution. Each Member State is required to frame its
law (including policies and procedures) within the Framework and with the aim of
implementing the Framework Agreement.
2. Federal Decree-Law No. (8) Of 2017 on VAT: Decree Law on VAT has been
passed by the UAE Government setting out the legal provisions for
implementation and management of VAT. The Effective date of the Decree Law
coming into effect is 1st January 2018 i.e. from this date VAT shall be applicable
across the UAE. However, online registration process would start from the end of
the third quarter of 2017.
3. Federal Decree-Law No. (7) Of 2017 on Excise Tax: The UAE has proposed to
implement the duty of excise from 1st October 2017 on few products like tobacco
products and fizzy drinks. However, over the period of time other products may
also be brought within the ambit of excise tax levy. The Federal law No. 7 deals
with detailed legal provisions for Excise.
4. Federal Law No. (7) Of 2017 on Tax procedures: The provisions of this Law
apply to tax procedures related to the administration, collection and enforcement
of Tax by the Authority. It is a common law which has been passed to regulate all
tax procedures related aspects for any tax imposed or to be imposed in the
country. As of now, only VAT is implemented and hence the provisions would be
applicable to VAT law. Once Corporation or any other taxes are introduced, the
tax Procedures Law would govern such Tax Laws also.
5. Common Customs Law: All GCC Members had implemented Common Customs
Law in January 2002 aimed at unification of the customs regulations and
procedures across Member States. It unifies the customs procedures in all the
customs administrations of the Member States and contributes to the
enhancement of cooperation in the customs field among the Member States.
Customs law, being in the nature of Indirect Tax and imposed on importation of
goods in the country, shall have direct bearing on the VAT. This requires one to
understand the Customs implications on the VAT and vice versa.
6. Executive Regulations under Excise, VAT and Tax Procedure Laws: The
Decree Laws provide for legal provisions for the respective Taxes, but many of the
conditions, procedures and detailed guidelines are covered through Executive
Regulations to be issued under respective tax laws. As of now, UAE has not
released Executive Regulations on these laws which are expected to be released
soon.
7. Other applicable law: In addition to above, there are many other local laws and
regulations which one must keep in mind while understanding the implication of
VAT thereon and vice versa.
Understanding of VAT Law of UAE
The basic features of UAE VAT Law are as below
• It is a general tax on consumption.
• The tax is in proportion to the price of goods or services
• It is levied at all stages of productions and distribution process upto and including
the retail trade stage.
• Taxable person has the right of deduction.
The VAT law is designed in a structured way. One can answer the determination of
VAT adopting following approach:
i. Who (Taxable Person liable to pay tax):
a) Liability to pay tax is on the person making taxable supplies of goods or
services in the course of his business, commonly known as supplier.
b) As exception to above, in some cases the liability to pay tax is shifted on
recipient of goods or services instead of on supplier of goods or services.
Such mechanism is called Reverse Charge Mechanism (RCM) and is
applicable on importation of goods or services in the State.
c) Person importing goods is also required to pay tax, whether such
importation is made in the course of business or for personal
consumption.
ii. What (Transactions liable to tax):
a) Liability to pay tax under VAT Law is on supply of goods or services or
both.
b) Scope of supply of goods is wide enough and covers not only transfer of
ownership in the goods but also transfer of right to use them. It also covers
agreement to sale which entails transfer of property in future.
c) Supply of service is also subject to VAT and is wide enough to cover “all
supplies that do not constitute supplies of goods”.
d) There is a concept of “deemed supply” also. Use of business asset for non
business purpose, alienation of assets without consideration, supply of
goods or services used for non business purpose, transfer of assets to
another member states without consideration etc. are few of the instances
where tax liability arises even there is no explicit supply.
iii. Where (Place of Supply of where liability to pay tax arises):
a) Place of supply determines the jurisdiction of State which is entitled to
collect the tax. Liability to pay tax arises if the place of supply falls within
State. There are separate provisions for place of supply of goods and
services.
b) Place of supply of goods, in case of supply to a taxable person, shall be the
place of residence of recipient of such goods. However, in case of supply to
a non-taxable person, place of supply shall be the place of residence of the
supplier.
c) Place of supply of services shall be the place of residence of supplier
subject to some exceptions in the Decree Law.
iv. When and how (chargeable event and chargeability of VAT)
a) VAT shall be charged on the Date of supply. Generally Date of supply shall
be earliest of the following:
• Date of issue of invoice
• Date of receipt of payment
• Date of completion of services
• Date on which goods were transferred
b) Tax invoice shall be issued by the supplier within 14 days of the Date of
Supply giving details as would be specified in the Executive regulations of
the Decree Law. Some of the basic details shall be name of the recipient of
goods or services, value of such supplied, tax amount charged, etc.
v. How much (taxable amount and tax rate)
a) Tax shall be charged on the value of supply of goods or services. Value of
goods or services shall be determined by the amount of monetary
consideration received by the supplier. In case non- monetary
consideration is received by the supplier, market value of such
consideration shall be taken as value of supply of goods or services.
b) Generally supply of goods or services is taxable at the standard rate of tax
(i.e. 5%) subject to some supplies which are taxable at zero rate (also
known as zero rated supplies) and some supplies which are exempt from
the applicability of tax. So, the supplier (taxable person) has to analyse as
to what supplies of his shall be covered under different tax rate.
vi. Exempted from payment of tax (exemptions and zero rated supplies)
a) Exempted supplies are the supplies which are out of the ambit of VAT
applicability. The following supplies have been exempted:
• Financial services
• Supply of bare land
• Supply of residential buildings
• Supply of local passenger transport
• However, the Executive Regulations shall provide for the conditions
to be satisfied to claim exemption.
b) Zero rated supplies are the supplies which do not involve any output tax
payment but are eligible for claiming refund of tax paid on procurements of
goods and services, which is not available in case of exempt supplies. The
list of zero rated supplies has been provided by Article 45 of the Decree
Law.
vii. Recoverable Input Tax
a) Tax paid or payable on procurement of goods or services can be recovered
by the taxable person, provided these procurements were made for the
purpose of making taxable supplies (supplies at standard rate and zero
rated supplies).
b) Recovery of input tax can be done either by setting it off against the output
tax liability or by applying for refund with the Authority. Excess input tax
may be carried forward to next period.
c) If input tax has been recovered on procurements made for the purpose of
making exempt supplies or used for non-business purpose, such use shall
be treated as deemed supply and output tax shall be charged.
viii.Adjustment from Tax payable
Output tax liability shall be adjusted in the following instances:
a) If supply was cancelled.
b) If tax treatment of supplies has changed due to change in the nature of
supply.
c) If agreed consideration is altered
d) If recipient of goods or services return the goods or services and the
consideration was also returned.
e) If tax was charged in error
ix. Transitional Provisions
a) These provisions mainly emphasizes on contracts continuing after the
effective date of implementation of VAT i.e. 1st January 2018. It broadly
provides that if supply of goods or services is after 1st January 2018, VAT
shall be charged irrespective of the fact that invoice was issued or payment
was received before such date. However, if supply of goods or services is
made before the effective date, no VAT shall be charged.
b) Consideration fixed as per executed contract shall be considered as
inclusive of tax and all supplies made post VAT would be subject to VAT.
Above write up is intended to give an overview of VAT in UAE for readers.
Acknowledging contribution of Mukul Goel in compiling the article.
Please write your comments and feedbacks at madhukar@hiregange.com or
ashish@hiregange.com
Thank You
Our Locations

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Bird eye view of vat in uae

  • 1. Hiregange & Associates Chartered Accountants By – CA Madhukar N Hiregange CA Ashish Chaudhary All Member States of the Gulf Cooperation Council (GCC) have agreed to implement the VAT system in unified manner latest w.e.f. 1.1.2019. Few of the countries have already taken substantial steps and have announced its implementation w.e.f. 1.1.2018. UAE Government has also issued Federal Decree Law on VAT providing for legal framework on VAT. Gulf countries mainly depend on revenues generated from extraction and distribution of oil products i.e. crude oil, gasoline, gas oil, fuel oil, natural gas and various other hydrocarbons. In the recent years, the price of oil in the world market has fallen drastically, leading to very low revenue with the government. This can be seen from the fact that the price of one barrel in the year 2008 was $ 147.54 which has fallen down to $48.66/barrel in the year 2017. Also, oil being a non-renewable resource, these countries cannot depend on oil revenue for a longer period of time. Hence, important purpose of introduction of VAT has been to arrange funds for social funding of the government. Implementation of VAT is going to have pervasive effects and cannot be seen in isolation. One must have knowledge of laws as mentioned below.
  • 2. Legal Framework of Indirect Taxation in UAE 1. The Unified VAT Agreement for GCC Countries (“Framework”): The framework agreement has been passed by all Member States of GCC for uniform imposition of VAT at a rate of 5%. The Agreement aims to establish a unified legal framework for the introduction of a general tax on consumption in the GCC known as (VAT) levied on the import and supply of Goods and Services at each stage of production and distribution. Each Member State is required to frame its law (including policies and procedures) within the Framework and with the aim of implementing the Framework Agreement. 2. Federal Decree-Law No. (8) Of 2017 on VAT: Decree Law on VAT has been passed by the UAE Government setting out the legal provisions for implementation and management of VAT. The Effective date of the Decree Law coming into effect is 1st January 2018 i.e. from this date VAT shall be applicable across the UAE. However, online registration process would start from the end of the third quarter of 2017. 3. Federal Decree-Law No. (7) Of 2017 on Excise Tax: The UAE has proposed to implement the duty of excise from 1st October 2017 on few products like tobacco products and fizzy drinks. However, over the period of time other products may also be brought within the ambit of excise tax levy. The Federal law No. 7 deals with detailed legal provisions for Excise. 4. Federal Law No. (7) Of 2017 on Tax procedures: The provisions of this Law apply to tax procedures related to the administration, collection and enforcement of Tax by the Authority. It is a common law which has been passed to regulate all tax procedures related aspects for any tax imposed or to be imposed in the country. As of now, only VAT is implemented and hence the provisions would be applicable to VAT law. Once Corporation or any other taxes are introduced, the tax Procedures Law would govern such Tax Laws also. 5. Common Customs Law: All GCC Members had implemented Common Customs Law in January 2002 aimed at unification of the customs regulations and procedures across Member States. It unifies the customs procedures in all the customs administrations of the Member States and contributes to the enhancement of cooperation in the customs field among the Member States. Customs law, being in the nature of Indirect Tax and imposed on importation of goods in the country, shall have direct bearing on the VAT. This requires one to understand the Customs implications on the VAT and vice versa. 6. Executive Regulations under Excise, VAT and Tax Procedure Laws: The Decree Laws provide for legal provisions for the respective Taxes, but many of the conditions, procedures and detailed guidelines are covered through Executive Regulations to be issued under respective tax laws. As of now, UAE has not released Executive Regulations on these laws which are expected to be released soon. 7. Other applicable law: In addition to above, there are many other local laws and regulations which one must keep in mind while understanding the implication of VAT thereon and vice versa.
  • 3. Understanding of VAT Law of UAE The basic features of UAE VAT Law are as below • It is a general tax on consumption. • The tax is in proportion to the price of goods or services • It is levied at all stages of productions and distribution process upto and including the retail trade stage. • Taxable person has the right of deduction. The VAT law is designed in a structured way. One can answer the determination of VAT adopting following approach: i. Who (Taxable Person liable to pay tax): a) Liability to pay tax is on the person making taxable supplies of goods or services in the course of his business, commonly known as supplier. b) As exception to above, in some cases the liability to pay tax is shifted on recipient of goods or services instead of on supplier of goods or services. Such mechanism is called Reverse Charge Mechanism (RCM) and is applicable on importation of goods or services in the State. c) Person importing goods is also required to pay tax, whether such importation is made in the course of business or for personal consumption. ii. What (Transactions liable to tax): a) Liability to pay tax under VAT Law is on supply of goods or services or both. b) Scope of supply of goods is wide enough and covers not only transfer of ownership in the goods but also transfer of right to use them. It also covers agreement to sale which entails transfer of property in future. c) Supply of service is also subject to VAT and is wide enough to cover “all supplies that do not constitute supplies of goods”. d) There is a concept of “deemed supply” also. Use of business asset for non business purpose, alienation of assets without consideration, supply of goods or services used for non business purpose, transfer of assets to another member states without consideration etc. are few of the instances where tax liability arises even there is no explicit supply. iii. Where (Place of Supply of where liability to pay tax arises): a) Place of supply determines the jurisdiction of State which is entitled to collect the tax. Liability to pay tax arises if the place of supply falls within State. There are separate provisions for place of supply of goods and services. b) Place of supply of goods, in case of supply to a taxable person, shall be the place of residence of recipient of such goods. However, in case of supply to a non-taxable person, place of supply shall be the place of residence of the supplier. c) Place of supply of services shall be the place of residence of supplier subject to some exceptions in the Decree Law.
  • 4. iv. When and how (chargeable event and chargeability of VAT) a) VAT shall be charged on the Date of supply. Generally Date of supply shall be earliest of the following: • Date of issue of invoice • Date of receipt of payment • Date of completion of services • Date on which goods were transferred b) Tax invoice shall be issued by the supplier within 14 days of the Date of Supply giving details as would be specified in the Executive regulations of the Decree Law. Some of the basic details shall be name of the recipient of goods or services, value of such supplied, tax amount charged, etc. v. How much (taxable amount and tax rate) a) Tax shall be charged on the value of supply of goods or services. Value of goods or services shall be determined by the amount of monetary consideration received by the supplier. In case non- monetary consideration is received by the supplier, market value of such consideration shall be taken as value of supply of goods or services. b) Generally supply of goods or services is taxable at the standard rate of tax (i.e. 5%) subject to some supplies which are taxable at zero rate (also known as zero rated supplies) and some supplies which are exempt from the applicability of tax. So, the supplier (taxable person) has to analyse as to what supplies of his shall be covered under different tax rate. vi. Exempted from payment of tax (exemptions and zero rated supplies) a) Exempted supplies are the supplies which are out of the ambit of VAT applicability. The following supplies have been exempted: • Financial services • Supply of bare land • Supply of residential buildings • Supply of local passenger transport • However, the Executive Regulations shall provide for the conditions to be satisfied to claim exemption. b) Zero rated supplies are the supplies which do not involve any output tax payment but are eligible for claiming refund of tax paid on procurements of goods and services, which is not available in case of exempt supplies. The list of zero rated supplies has been provided by Article 45 of the Decree Law. vii. Recoverable Input Tax a) Tax paid or payable on procurement of goods or services can be recovered by the taxable person, provided these procurements were made for the purpose of making taxable supplies (supplies at standard rate and zero rated supplies). b) Recovery of input tax can be done either by setting it off against the output tax liability or by applying for refund with the Authority. Excess input tax may be carried forward to next period. c) If input tax has been recovered on procurements made for the purpose of making exempt supplies or used for non-business purpose, such use shall be treated as deemed supply and output tax shall be charged.
  • 5. viii.Adjustment from Tax payable Output tax liability shall be adjusted in the following instances: a) If supply was cancelled. b) If tax treatment of supplies has changed due to change in the nature of supply. c) If agreed consideration is altered d) If recipient of goods or services return the goods or services and the consideration was also returned. e) If tax was charged in error ix. Transitional Provisions a) These provisions mainly emphasizes on contracts continuing after the effective date of implementation of VAT i.e. 1st January 2018. It broadly provides that if supply of goods or services is after 1st January 2018, VAT shall be charged irrespective of the fact that invoice was issued or payment was received before such date. However, if supply of goods or services is made before the effective date, no VAT shall be charged. b) Consideration fixed as per executed contract shall be considered as inclusive of tax and all supplies made post VAT would be subject to VAT. Above write up is intended to give an overview of VAT in UAE for readers. Acknowledging contribution of Mukul Goel in compiling the article. Please write your comments and feedbacks at madhukar@hiregange.com or ashish@hiregange.com