What is VAT?


  • Overview

 

Tax

 

Tax is aform of payment issued by the government to raise revenue to pay for public services. The Tax collected from the people is generally used to pay for things such public hospitals, schools and universities, defense and other important aspects of daily life. There are different types of taxes, mainly:

  • ​Direct Tax
  • Indirect Tax

A direct tax is collected directly from the person by the means of income tax, corporate tax etc. whereas an indirect tax is collected by an intermediary by the means of a retail store or vat.

What is VAT ?

The VAT or Value Added Tax is an indirect form of taxation that has now been recently introduced in the UAE. The VAT is one of the most common types of tax found across the Globe with over 167 countries having implemented the VAT (or an equivalent). In this system it is the ultimate consumer who bears the tax while VAT registered businesses collect and account for the tax, thereby acting as a tax collector on behalf of the tax authorities. A business pays the government the tax that it collects from its customers after deducting the tax it has paid on valid purchases/ expenses. The net liability is the amount that the government receives and it reflects the ‘value add’ throughout the supply chain.

 

NEED OF TAX IN UAE

The introduction of tax in UAE is a part of the GCC-wide initiative. The intent of tax is to diversify regional economies in the country. The reduction of oil prices in the recent year and also the dependency on hydrocarbons made the GCC member states to impose revenue-raising measures. The GCC member states have agreed to sign unified framework agreements for the implementation of VAT and Excise taxes.

The UAE government provide many public services like healthcare, roads, education, parks, social services and waste management. The expenses of these services are paid by the government budgets. VAT and Excise taxes will provide our country with a new source of income to continue delivering excellent public services and ensure a high quality of life.

 

VALUE ADDED TAX (VAT)

Value-Added Tax or VAT is an indirect tax on the consumption or use of goods and services. VAT is imposed on most supplies of goods and services that are bought and sold. VAT is a form of indirect tax and is used in more than 180 countries around the world.

VAT is charged at each step of day to day expenses. Ultimate consumers generally bear the VAT cost while Businesses collect and account for the tax. Businesses act as a tax collector on behalf of the government.

VAT will be introduced across the UAE on 1 January 2018 at a standard rate of 5%.

The below illustration demonstrates how VAT works throughout a business:

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