Value Added Tax (VAT) is an indirect tax. It is a type of general consumption tax that is collected incrementally, based on the value added, at each stage of production or distribution/sales. It is usually implemented as a destination-based tax.
UAE are among the first GCC member states to introduce VAT, with a effective date of 1 January 2018. VAT will be charged at the standard rate of 5%.There are certain supplies and services which will be subject to zero rate or under exempt categories.
TREATMENT OF VAT UNDER TRANSITIONAL RULE
Transitional rules refer to those transactions which are going to overlap the two periods i.e. period before and after vat implementation. For example, following scenarios are covered under transitional rule:
Transitional provisions for supply of goods and services
-Supply of goods and services on/after January 1, 2018
If the supply of goods/services takes place on/after January 1, 2018, but the payment for the supply had been completed before January 1, 2018, VAT is applicable on the supply. The supplier should collect and remit VAT for the transaction despite the payment being made before the VAT regime.
-Supply of goods/services in installments on/after January 1, 2018
If a supply is partially made before January 1, 2018, and the remaining part of the supply is to be made on/after January 1, 2018, the portion of the supply made after the implementation of the VAT regime is taxable. The same is applicable on supply delivered in parts/instalments. The parts/instalments delivered before January 1, 2018 are not taxed, however VAT is levied on the parts/instalments supplied after January 1, 2018.
-Issuing invoice for supply of goods and services
If an invoice is issued on/before January 1, 2018 for goods/services to be supplied after January 1, 2018, the supplier should make sure VAT is collected and paid for the supply. In this case, since the payment was already made, an additional invoice showing the tax charged on the transaction should be issued.
Transitional provisions for contracts
If two businesses have a contract that concludes before January 1, 2018, and goods/services are to be supplied on/after January 1, 2018, the contract will be considered inclusive of VAT. This means, the firm supplying goods/services should levy VAT on the supply made on or after January 1, 2018.
- If the contract is silent on the treatment of VAT, value of supply will be considered as Inclusive of tax.
- If the contract states the treatment of VAT, value of supply will be exclusive of tax and tax will be collected over and above the value.
Goods sold by trading companies before 01st January 2018, but delivered (includes transportation) or made available (when transportation is not included) after 31st December 2017. VAT will be applicable over such supplies. VAT is applicable on the goods delivered to the recipient or made available (the supply is ready but hasn’t been delivered to the recipient yet) on/after January 1, 2018.
BUSINESSES DEALING WITH CALL OFF STOCK.
When goods are delivered to a potential customer’s premises or warehouses, the ownership still belongs to the supplier until the recipient claims the stock, is termed call off stock. In this case, VAT is applicable on the goods sold or taken from the stock after January 1, 2018.
For example, the trader supplies goods the potential customer’s warehouse on February 2, 2017. Goods that are taken or sold from this supply on January 20, 2018. VAT will be applicable on such goods, and tax invoice should be issued to record the sales transaction.
Transitional rules refer to those transactions which are going to overlap the two periods i.e. period before and after vat implementation.
In case of the construction contracts running over the period of commencement date, VAT is not applicable on the portion of supplies provided before 31st December 2018. For real estate contracts, VAT is applicable on supplies made on or after January 1, 2018.
Insurance policies which are issued or renewed on or after 01st January 2018, will be subject to VAT.
Insurance contracts which have payment in installment basis, the due dates of the installments which are getting due after 31st December 2017 will be subject to VAT.