Since the introduction of Value-Added Tax (VAT) in the UAE at a rate of 5% on January 1, 2018, many businesses continue to face challenges in understanding and implementing the regulations correctly. At HayyaTax, we regularly encounter clients who are confused about the distinction between Zero-Rated VAT and Exempted VAT supplies.
Despite VAT being in place for several years now, these categories remain a source of uncertainty among business owners. The differences between them significantly impact compliance, financial planning, and overall tax strategy. Our tax consultants at HayyaTax are dedicated to helping businesses navigate these complexities.
Understanding the nuances between these VAT classifications is essential for proper tax planning and compliance with FTA regulations. This article aims to clarify these concepts to help our clients make informed decisions.
What is Value Added Tax (VAT)?
Value Added Tax is an indirect tax levied on the consumption of goods and services. It is added at each stage of the supply chain and ultimately borne by the end consumer. As tax consultants at HayyaTax, we help businesses understand their VAT obligations and optimize their tax position.
What are the types of VAT?
VAT in the UAE can be categorized into three main types, depending on the nature of supplies:
Standard-Rated VAT: This includes goods and services subject to the standard VAT rate of 5%. The UAE Government provides a detailed list of these goods and services, which our experts at HayyaTax can help you identify for your business.
Zero-Rated VAT: This category includes goods and services that are charged at 0% VAT, such as exports to GCC countries that have not implemented VAT.
Exempted VAT: These are goods and services that are not charged with any VAT, meaning they don’t incur input or output VAT.
What are Zero-rated supplies in the UAE?
As defined by Federal Decree-Law No. (8) of 2017 on Value Added Tax, zero-rated supplies are taxable supplies subject to a 0% VAT rate. While technically VAT is applied, the customer pays no VAT. However, businesses making zero-rated supplies can still recover input tax on related purchases.
List of Zero-rated Goods and Services under VAT in UAE
According to Article 45 of Federal Decree-Law no (8) of 2017, the following supplies are zero-rated:
- Educational Services: Private and public school education (excluding higher education), higher education provided by government-owned institutions or those 50% funded by the government, nursery education, and educational activities
- Exports: Export of goods and services outside the GCC implementing states
- Basic Healthcare: Preventive and basic healthcare services provided by approved entities
- Transportation: International transportation of passengers and goods, including related services
- Means of Transport: Supply of airplanes, ships, and vehicles used for passenger and goods transport
- Rescue and Assistance: Supplies for aircraft and vessels designed for rescue operations
- In-flight Supplies: Food and drinks consumed onboard during travel
- Investment Precious Metals: Gold, silver, and precious metals meeting specific purity standards
- New Residential Buildings: First sale or lease of new residential buildings within 3 years of completion
- New Charitable Buildings: First sale or lease of buildings used by charities
- Converted Residential Buildings: First sale or lease of buildings converted from non-residential to residential
- Oil and Gas: Supply of crude oil and natural gas
Our team at HayyaTax can help determine if your business qualifies for zero-rated supply status and how to properly document these transactions for VAT recovery.
What are Exempt Supplies in UAE?
Unlike zero-rated supplies, exempt supplies are not considered taxable. No VAT is charged on these supplies, and businesses cannot recover input tax on related purchases.
List of Exempted Goods and Services under VAT in UAE
As per Article 45 of Federal Decree-Law no(8) of 2017, these supplies are exempt from VAT:
- Financial Services: Services by banks, investment firms, and financial institutions
- Domestic Transportation: Passenger transportation within the UAE
- Insurance and Reinsurance: Life insurance and reinsurance services
- Government Activities: Sovereign activities by designated government bodies
- Not-for-Profit Organizations: Activities of foreign governments, international organizations, diplomatic bodies, and charitable organizations
- Resale of Existing Homes: Sale or lease of residential property that’s not a first supply
- Bare Land: Sale or lease of vacant land
- Local Public Transport: Bus services, metro, taxis, and other public transportation
- Salaries: Activities undertaken by employees in course of employment
- Tax Group: Supplies between members of a single tax group
Difference between Zero-Rated VAT and Exempted VAT
At HayyaTax, we find that many clients confuse zero-rated and exempt supplies because both result in no VAT being charged to customers. However, the key difference lies in input tax recovery rights. Our tax experts can help you understand these differences and their business implications:
Input VAT Recovery
Zero-Rated VAT: Businesses can recover VAT paid on expenses (input VAT) related to zero-rated supplies, reducing overall tax burden and improving cash flow.
Exempted VAT: Businesses cannot recover input VAT on expenses related to exempt supplies, potentially increasing operational costs.
Impact on Business Cash Flow
Zero-Rated VAT: These supplies require detailed record-keeping but allow input VAT recovery, positively impacting cash flow.
Exempted VAT: These supplies may not require VAT registration, but the inability to recover input VAT can strain cash flow.
Vendor Registration and Compliance
Zero-Rated VAT: Vendors must register for VAT if turnover exceeds the threshold and must document all transactions.
Exempted VAT: Vendors dealing only in exempt supplies may not need to register for VAT, simplifying compliance but restricting input VAT recovery.
Pricing and Profitability
Zero-Rated VAT: Recovering input VAT helps businesses keep costs lower, enabling more competitive pricing.
Exempted VAT: Higher operational costs due to irrecoverable VAT may necessitate higher pricing to maintain profitability.
Documentation and Reporting
Zero-Rated VAT: Requires meticulous documentation for VAT reporting and claiming input VAT deductions.
Exempted VAT: Less stringent documentation requirements but limited tax recovery options.
Taxable Turnover Inclusion
Zero-Rated VAT: Included in taxable turnover, affecting VAT registration thresholds and reporting.
Exempted VAT: Not included in taxable turnover, potentially excluding businesses from VAT registration.
How HayyaTax Can Help
When it comes to VAT and taxation in the UAE, our team of expert consultants at HayyaTax can help you:
- Properly categorize your transactions as standard-rated, zero-rated, or exempt
- Ensure compliance with FTA regulations
- Optimize your tax position and cash flow
- Prepare and file accurate VAT returns
- Develop strategies to manage input VAT recovery
- Navigate VAT audits and inspections
- Provide ongoing support as VAT regulations evolve
While VAT laws have been in place in the UAE for several years, many businesses still face challenges with implementation. Our professionals at HayyaTax have extensive experience in UAE tax regulations and can help you avoid costly mistakes and penalties.
Contact HayyaTax today for a consultation to ensure your business is VAT-compliant while maximizing available tax benefits.
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