Next time you are buying groceries in your local market, randomly pick out a product and see if the description mentions the Value Added Tax. If it is not mentioned on the product directly then it might be reflected in the receipt you get after the purchase.
There are only a handful of countries that don’t charge VAT Tax and the United Arab Emirates, used to be one of those. However, this changed in 2018 when for the first time it introduced a VAT on its citizens, albeit in a limited capacity.
Today we will find out why the UAE introduced VAT, how the VAT works in the UAE, and how businesses and individuals fare VAT-wise in the UAE compared to other countries in the world.
What is VAT?
Value Added Tax or VAT is a tax that is levied on goods and services that are essential parts of the supply chain needed to produce goods as well as their distributions. While it is the businesses and companies that pay this tax directly to the government, they add the VAT tax to the price of the product.
So, you as the customer are essentially paying this tax. Value Added Tax usually ranges from 5% at the low end to 25 % or more on the high end and it is not essential that every country may levy this tax or even levy it on all products and services as we will see next.
How Does VAT Tax Work in UAE?
In the United Arab Emirates, the standard rate of VAT is 5% and is included in most goods you buy in the country. UAE does not have a lot of taxes besides this VAT and the Corporate Tax and even then, compared to most countries 5% is very low.
It is not only low but only applied to businesses that are on the mainland UAE and have a revenue of over AED 375,000. For most businesses located in the designated free zones, the VAT does not apply even if their revenue is above the threshold.
For more details on how VAT tax works in the UAE, you can read about it here.
Why did the UAE Introduce VAT?
Almost every country levies VAT among other taxes to generate revenue but the United Arab Emirates and other major oil exporters in the region for a long time relied solely on the revenue generated from oil exports to run the country, which is not a long-time prospect.
Not only will the oil eventually run out, but most countries are moving towards greener alternatives for their energy needs. So, the UAE recognizes this and realizes that it as a country needs to diversify and create other revenue streams like the VAT and corporate tax.
But this is not the only way UAE is diversifying, as it is slowly transforming itself as the business and tourist capital of the world, and in a bid to do this, it has kept VAT very low and under specific conditions so as to attract more foreign investment and businesses into the country.
Impact of VAT on UAE’s Economy
For the most part, the VAT has proven to be good for the country. Here is how
Inflation as a result of VAT
The usually negative aspect associated with VAT is inflation, which when added, increases the prices of goods but in the case of UAE it has not affected the country as the tax is very low and the economy of the country is strong, as well as the buying power of the people.
Impact on Foreign Investment
Secondly, it has not deterred foreign investment from flowing into the country, partly again due to the low taxes and partly because of the friendly rules and regulations of the country towards businesses, in the form of free zones and other such initiatives.
Fiscal Sustainability
On the positive side not only, it has generated a new revenue stream for the country but it has also made the country more fiscally sustainable as it has to rely less on the fluctuating oil prices, which have seen serious fluctuation in the last five years.
Even though the prices have gone up the fluctuation can still affect the budget of a country that does not have other revenue schemes like VAT or Corporate Taxes.
Advantages of UAE’s Designated Freezones for VAT
Besides the many other advantages of setting up a business in the UAE, one of the biggest reasons why investments have still kept flowing into the country is because of the many free zones UAE has created, especially those where VAT does not apply to most the businesses.
To understand what these designated free zones are and why VAT does not apply on businesses in these zones, you read more about them here.
Comparing UAE’s VAT with other Countries
When we look at the Value Added Tax that other countries charge their citizens, we find that UAE’s VAT is very low, and here is a comparison with some other major countries.
- USA: USA does not levy VAT at the federal level but individual states levy sales tax instead of VAT and the rates vary from 2.9% to 7.5%. While this sounds very low, combined with other taxes, average US citizens pay more taxes than most UAE citizens.
- China: The standard rate of VAT in China is around 13 % more than twice that of UAE. It can be lower for some goods and services but even then, it is almost twice that of UAE.
- India: In India, instead of VAT they have Goods and Services Tax (GST) and it has different levels starting at 5% for essential items and going as high as 28% for luxury Items.
- Saudi Arabia: Saudi Arabia introduced a VAT of 5% at the same time as the UAE did, however right now its VAT sits at 15%, and similarly to the UAE some goods and services are exempt to it.
- Japan: In Japan, the VAT is at 10%, twice that of the UAE.
These VAT rates are subject to change, but they give you a really good idea of how UAE has a really low VAT compared to other countries and when combined with the other government incentives UAE becomes the perfect country for most businesses to operate in.
