Why United Arab Emirates(UAE) is Implementing VAT?

What is VAT?

VAT – Value Added Tax is general consumption tax collected fractionally at every stage of value addition to goods or services. As of 2016, more than 193 countries have implemented VAT. VAT is considered the best taxation procedure which collects tax at each stage of the supply chain process. Therefore, double taxation is completely avoided in this method. VAT is generally paid by the end consumer and businesses who involved in the supply chain process will collect the tax on behalf of the government.
Below picture explains How VAT is collected at every stage of cloth production to end consumer.

Why UAE is implementing VAT and Excise tax?

UAE government provide the citizens and residents with world class infrastructure includes public services like roads, hospitals, education, security, etc.., The expense for these services are taken care from the government budgets. Now, the new source of income through VAT will help the government to continue the best services they provide and also implement new services in the future. It will also help the government to reduce its dependency on the natural resources such as oil, hydrocarbons, etc..
United Arab Emirates government and GCC countries have decided to implement VAT before January 2019. However, the UAE government have decided to implement VAT from 1st January 2018 onwards.
Excise tax is a form of indirect tax levied on some products which are considered harmful for humans and environment. Excise tax will be applicable for Tobacco products, Energy drinks and Carbonated drinks, rates are 100%, 100% and 50% respectively. Excise tax will be effective from 1st October 2017.
The reason behind doubling the cost of products like cigarettes, Energy drinks and Carbonated drinks is to reduce the consumption and increase the quality of life by consuming healthy products.

How VAT will affect people living in UAE?

UAE government have decided to levy 5% VAT – Value Added Tax for all goods and services. Therefore, the cost of living in UAE will slightly increase compared to previous years. It also depends on the life style of the family or individual. Example: Assume a person spends AED 5000 for luxury products in the year 2017 will spend AED 5250 for the same products in 2018. However, there are exemptions for certain essential category like education, healthcare and food items.

How government will collect the VAT from consumers?

Businesses on behalf of government collects the VAT and pay to the government. Seller will collect the VAT from buyer when goods or service sold, then the seller will deduct his/her input VAT credit and pay the remaining to the government. Brainsphere IT Solutions helps companies to implement VAT Enabled ERP and VAT Compliant Accounting Software in Dubai, Abu Dhabi, Sharjah, Ajman and other Middle East countries to make the business transactions and tax filing simple and quick.

Conclusion

The citizens and residents of the UAE enjoying the best in the world infrastructure for a long duration of time. The government took the responsibility and provided the best public services to the people from government’s budget. Now it’s time to pay back to the nation that served the people without any expectation like rain. This new policy and taxation system will bring more public participation and responsibility to the citizens and residents of UAE. Change is inevitable and it always shapes one better. Let’s get ready for the new morning on 1st January 2018.