Understanding UAE VAT Impact on Your Finances (Salary) and Businesses

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April 16, 2024

Confused about how VAT will affect your pocket? Want to know more about the taxes which are coming to the UAE? Will you be paying the VAT from your salary and what is the percentage? This article will attempt to dispel any misconceptions that you may have about the new tax to be implemented in the UAE.

VAT (value-added tax) is a consumption tax, which is similar to GST (general sales tax) in that the tax is levied on goods and services. This is significantly different from the Corporation tax, which is a tax on companies and businesses and is based on their profits. Income tax is a tax on individuals and is declared by them to the government or deducted directly from salaries. Both of which are not to be implemented in the UAE for the foreseeable future but the lack of both is probably one of the fundamental reasons ex-pats have moved to the UAE.

So what is VAT? VAT is an indirect tax that is collected for the government by the intermediary organization that charges VAT on goods and services. It is charged at each step of the supply chain and the ultimate consumer generally bears the VAT cost. So for example, when an electric goods manufacturer produces TVs in the UAE, it will pay VAT on the material imported and charge VAT plus the cost price to the wholesaler. The wholesaler then charges that retailer its mark-up on the goods with VAT on top when selling the goods to the retailer. The retailer again, adds their mark-up and VAT on the goods, which are sold to the consumer. All through this supply chain, from the manufacturer to the retailer, each entity in the supply chain will be paying the difference between the VAT charged and the VAT paid to the government and it is only the consumer who will be paying the VAT without a refund from the government. This type of VAT is also one of the more common types of consumption tax found around the world.

VAT is implemented across 150 countries around the world including all 29 EU members as well as Canada, the UK, New Zealand, Australia, Singapore, and Malaysia to name a few. For some countries, it is an important source of sovereign revenue. For example, in France, it accounts for 50% of state revenues. The implementation of VAT was agreed upon by all GCC members (Saudi Arabia, UAE, Bahrain, Qatar, Kuwait, and Oman) in June 2016 and it was agreed that implementation would start in January 2018. It has also been confirmed that the rate of VAT will be at 5% on all goods and services except for certain local transport, a basket of food items, and specific medical and education services.

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