UAE and the Gulf region have long enjoyed zero taxes, but it changed after 2018. Value Added Tax (VAT) was implemented in UAE from January 1, 2018, at a rate of 5%. The idea behind the implementation of VAT was to bring a new source of revenue for the Government and make the economy less dependent on the petroleum industry.
Since the implementation of VAT in the UAE, there has been a lot of confusion regarding zero-rated and exempted VAT. In this article, we will help you understand VAT regulations in UAE and goods and services that come under exempted and zero-rated value-added taxes.
Let’s get started!
What is Value Added Tax (VAT)?
Value Added Tax is a form of indirect tax that is levied on the consumption of certain goods and services. VAT is added at each stage of the supply chain and in the form of a consumption tax that is ultimately borne by the end customer.
What are the Types of VAT?
VAT can be divided into three major categories, depending upon the nature of supplies:
1. Taxable VAT:
This category includes goods and services that are subject to a VAT rate of 5%. The Government of UAE has provided a detailed list of these goods, as described below in this article.
2. Exempted VAT:
This category includes goods and services that are not charged any VAT. It means that they don’t incur any input or output VAT charges.
3. Zero-Rated VAT:
This includes goods and services that are exported to any GCC country that has not implemented VAT. In such cases, these goods are charged a 0% VAT.
What is VAT Exempt?
VAT exemption refers to goods and services in the UAE that cannot be charged VAT or business entities that are not subject to value-added text. If a product is VAT exempt, it means that:
- Business owners cannot charge the VAT rate on the prices of the exempted goods sold.
- No records of sales of VAT exempted goods are required
- VAT cannot be reclaimed on these exempted goods that were purchased.
- The sale of VAT-exempted goods doesn’t come under the VAT taxable turnover of a business.
In some cases, businesses can be considered partially VAT exempted. It means that a company has registered for VAT but sells both taxable products/services and exempted goods. Such companies can claim VAT incurred from the sale and production of VAT-exempted goods. For such a business, it is essential to get VAT consultancy services from a reputable firm to avoid penalties.
List of VAT Exempted Products:
According to Article 46 of the Federal Decree-Law Number 7 of 2017, only four following items are exempted from VAT, as discussed below:
- Financial Services that are not conducted in return for a fee or return.
- Residential Buildings
- Bare Land
- Local Passenger Transport Services
What is Zero-Rated VAT?
Zero-Rated VAT includes goods and services that are VAT taxable but at the rate of 0%. It means that you have to keep a record of them and report them on VAT returns even if the rate is 0%. Businesses dealing with Zero-Rated goods and services can reclaim their input VAT, as they are VAT-registered companies in the UAE.
List of VAT Zero-Rated Items (Examples):
According to Article 45 of Federal Decree-Law Number 8 of 2017, the following is the list of goods and services subject to 0% VAT:
- International transport
- Exports (Direct/Indirect)
- Air Passenger Transport
- Supply of Air, Land, and Sea Transport
- Goods and Services related to the Supply of Means of Transportation.
- Aircraft and Vessels of Rescue
- Sale of Residential Buildings
- Investment in Precious Metals.
- Supply of Goods and Services related to the Transfer of Goods and Passengers.
- Charitable Building Supplies.
- Oil and Gas.
- Educational Services.
- Healthcare Services.
- First Supply of Residential Building.
What’s Taxable, Zero-Rated, and Exempt Goods and Services, and What’s Not?
If you still have some confusion regarding Zero-Rated, Taxable, and Exempted VAT categories, below is a detailed list of all the supplies that are subject to 5% VAT, 0% VAT, and those that are completely exempt from value-added tax.
1. Education Sector:
List of 5% VAT rate in the education sector
- Education services provided by private higher education institutes.
- School uniforms
- Electronics like laptops, computers, tablets, projectors, etc.
- School trips for recreation purposes
- Extracurricular activities (after school)
- Renting of school grounds for events
List of 0% VAT rate in the education sector
- Private and public school education (excluding higher education)
- Higher education offered by Government-owned or sponsored institutes
- Nursery and Pre-school education
- School trips for educational purposes (curriculum-based)
- After-school activities provided by the school and teachers.
2. Healthcare Sector
List of 5% VAT rate in the health sector
- Healthcare services that are not a part of medical treatment, dental, or prevention (cosmetic surgery, etc.)
- Medicine and medical equipment not listed in the official Cabinet document.
- Other medical supplies
List of 0% VAT rate in the health sector
- Services for preventive healthcare including vaccines
- Healthcare services for the treatment of human beings (including dental and medical)
- Medicines and medical equipment listed in the official Cabinet document.
Learn more about Health and Medicine VAT
3. Oil and Gas
List of 5% VAT Rate in Oil and Gas Industry
- Products of oil and gas (including petrol available at the petrol pumps)
List of 0% VAT rate in Oil and Gas Industry
- Natural gas and crude oil
4. Transportation Sector
There are no supplies under a 5% VAT rate in this sector.
List of 0% VAT rate in Transport Sector
- International transportation of goods and passengers (including intra-GCC flights)
- Supply of goods and services related to particular means of transportation of passengers and goods.
- Supply of means of transport by sea, air, or land for commercial purposes of passengers and goods.
List of VAT Exempt in the Transport Sector
- Transportation of domestic passengers (including flights within the UAE)
5. Real Estate Sector
List of 5% VAT Rate in the Real Estate Industry
- Sale and rent of commercial buildings/property (not used for the residential purpose)
- Service accommodation places like hotels, motels, inns, etc.
- Personal residence/home owned by a UAE citizen (recoverable tax)
List of 0% VAT Rate in the Real Estate Industry
- First sale/rent of a residential building after construction
- The first sale of a building for a charitable cause.
6. Financial Services Sector
List of 5% VAT rate in Finance Services
- Goods and Services, having an explicit fee, discount, commission, rebate, or similar return.
List VAT Exempt Services in Finance Services
- Interest in various forms of lending like loans, credit, financial leases, etc.
- Issuing, transfer, or allotment of equity or debt security.
- Products based on a margin like products with an explicit fee, commission, rebate, etc.
7. Insurance Service Sector
List of 5% VAT Rate in the Insurance Industry
- Insurance and reinsurance services (motor, property, health, etc.)
List of VAT Exempt Services in the Insurance Industry
- Life insurance and reinsurance
8. Investment (Gold, Platinum, Silver)
List of 5% VAT Rate in Investment
- Less than 99% pure
List of 0% VAT Rate in Investment
- 99% or above pure and tradable in the global markets
9. Telecommunication Services
List of 5% VAT Rate in Telecom Services
- Wireless and wired telecommunication services
10. Food and Beverages
All supplies under food and beverages are subject to 5% VAT.
11. Non-Profit Organizations
List of Services outside VAT framework
- Charitable activities carried out by associations and societies of public welfare listed by the Cabinet.
- Activities that are not business activities by non-profit organizations.
- Activities carried out by international organizations, diplomatic bodies, and foreign governments.
12. Free Zones
List of Services outside VAT framework
- Sale and purchase of goods and services between the companies in designated free zones.
List of 5% VAT Rate
- Sale/ Purchase of goods and services in the UAE
- Second-hand goods (used vehicles, etc.), collector items, and antiques (5% of profit margin).
List of 0% VAT Rate
- Export of goods and services outside the GCC States.
List of Services outside VAT Framework
- Supply of goods and services between members of a single tax group.
- Activities carried out by employees in the course of their employment (including salaries).
Difference between Zero-rated and Exempt VAT in UAE
Businessmen in the UAE often get confused between these two terms because both sound very similar but are quite different in meaning. Exempted VAT includes goods and services that are not charged any VAT, while in Zero-Rated VAT the taxable goods and services are subject to a VAT rate of 0%, instead of 5%. Following are some of the other significant differences between these two terms:
|In this category, VAT is not applied at all on the goods and services sold/purchased.||In this category, the taxable goods and services are subject to a VAT rate of 0%, instead of 5%.|
|A vendor dealing with exempted VAT goods cannot claim input tax.||In this case, the vendor can claim input tax on related expenses of goods and services.|
|This is not part of taxable turnover.||This is part of the taxable turnover.|
|If the business deals with only exempt goods and services, it cannot apply for VAT registration.||If the value of the taxable goods and services is above the specified threshold, the business must register for VAT.|
|There is no need to keep particular documents as the business cannot claim the tax.||The business dealing with zero-rated products must keep all the documents of its transaction as proof.|
Happy VAT Filing!
When it comes to VAT and taxation in UAE, make sure you have all the facts clarified and verified your business model so that you can adhere to all the rules and regulations. You need to hire a professional VAT consultant to categorize your business and services under exempt or zero-rated. Otherwise, you will face a lot of problems during the filing of taxes and returns.
In UAE, these value-added tax laws are relatively new; that is why it is best to consult with a VAT expert to ensure compliance with the rules and regulations set forth by FTA and reduce the risks of penalties and legal consequences.