In UAE, VAT is applicable at the rate of 5% on supplies of goods and services (if eligible under standard supplies). It is important to understand that products and services offered by suppliers will be under the category of standard 5%, zero-rated and exempt supplies. Failing to understand these compliances might result in the non-filing or late filing of VAT return in UAE, thereby attracting penalties. There are two types of supplies under the provisions of VAT law in UAE, viz, taxable (5% & zero-rated) and non-taxable (exempt) supplies.
To assimilate the difference between ‘zero-rated’ and ‘exempt’ supplies, let us understand the meaning of each of them.
Zero-Rated supplies are supplies that are taxable but at 0%. You will need to disclose your zero-rated supplies in your VAT which is not required in the case of exempt supplies. This category refers to the export of goods and services outside the GCC on which VAT in UAE is charged at 0%. In this case, your VAT liability is not increasing but you can claim your ITC.
According to Article 45 of Federal Decree-Law, Number 8 of 2017 provides the list of zero-rated supplies such as –
- International transport of goods and passengers,
- First sale/rent of residential buildings,
- Certain investment precious metals etc.
Exempt supplies are those supplies that are not taxable for VAT purposes. VAT is not charged on them and a supplier cannot claim ITC (Input Tax Credit) on these supplies and it becomes the cost of the goods or services purchased.
For example – Raw material acquired at 5% VAT is used for the production of goods and if the final product/ service is exempted under the law, VAT paid at 5% on the input cannot be claimed as ITC and becomes the cost of the product.
The Exempt supplies are listed in Article 46 of the Federal Decree-Law no. (8) of 2017 on Value Added Tax, such as –
- Financial services including life insurance as well as financial services that are not conducted for an explicit fee, commission, rebate or any similar type of consideration,
- Supply of bare land,
- Supply of local passenger transport etc.
Question: Do I need to register?
- In case of Exempt supplies: If all supplies you make are exempt, you do not have to register with the FTA (Federal Tax Authority). In such a case you cannot recover tax incurred on business purchases.
- In case of Zero-rated supplies: As a supplier, you must register for VAT if your taxable turnover (which includes zero-rated supplies) exceeds or is expected to exceed AED 375,000 in a 12-month period or in the next 30 days, respectively. However, you can ask for an exception from registration only if you do not have any standard-rated supplies (5%). In cases when this exception granted by the FTA, you cannot claim ITC.
Question: Do I need to file returns?
- In case of Exempt supplies: No. In case of a supplier having only exempt supplies as mentioned above, he need not register hence not required to file returns.
- In case of Zero-rated supplies: If you do not qualify for an exception from registration, then you must file the return. You are also entitled to claim ITC incurred on business purchases subject to normal conditions.