Value Added Tax (VAT) in the UAE
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Value Added Tax (VAT) in the UAE

Value Added Tax in the UAE

UAE has had one of the best runs for its economy so far, with an ever-increasing GDP, stabilizing inflation rate and a significant development in its IT sector. In October 2017, UAE became the only nation to establish a dedicated Artificial Intelligence Ministry and announce a major AI Strategy, focusing on multiple areas within its economy – including a space mission to Mars. However, the most influential change that will roll in full effect is the introduction of Value Added Tax (VAT). The tax will be imposed from January 1st, 2018 at a fixed rate of 5 percent on all taxable items as part of UAE’s efforts increase and diversify its revenues on a broader spectrum within its economy. VAT will be levied on each product’s gross margin from the stage of manufacturing, distribution or sales. Since the recovery process is easier and promptly impossible, the implementation will see stable returns and a positive response from UAE’s business community.

What is VAT?

Value Added Tax (VAT) is imposed when a value is added on a good or service during the stage of production or at the point of retail sale. However, the amount of VAT paid depends on the direct relation of product cost, minus the costs of the resources used in producing the good or service that is already taxed.

Already a popular form taxation system in the European Union, VAT has also received expansive deployed across different economies around the world. Across the world, over 160 countries have implemented VAT on their domestic products and services.

What are the Advantages of VAT in UAE?

  • Theoretically, the implementation of VAT will confer robust incentive to earn, while encouraging consumers to open savings and avoid frivolous spending
  • As an additional source of income, the UAE and other GCC countries will reserve an additional margin for public spendings and other welfare projects
  • The revenue generated will remain consistent as the consumption of basic commodity products and services continues.
  • The VAT rate of 5% could help generate additional revenue for the UAE, roughly equivalent to about 1.5% of the country’s GDP (Gross Domestic Product)
  • Regardless of the consumer’s income, VAT is based on the taxpayer’s consumption, allowing an equal share of taxation across income levels.

How Will VAT Affect UAE Businesses?

In accords with UAE’s Ministry of Finance, if a business benefits from an annual turnover of AED 375,000, the business owner is obligated to register as a VAT payer. A business can also register voluntarily to avail VAT’s advantages, if the annual turnover is in the bracket between AED 187,500 and AED 375,000.

Businesses in this regard serve as a key component in the entire process, acting as collecting agents by gathering the tax amount on the government’s behalf. This way the tax gets ultimately passed to the end consumer instead of becoming the business’s liability.


While there are some minor indirect costs associated with pricing, financial reporting, cash-flow, tax accounting and compliance processes for VAT vendors, the cost of non-compliance can be far greater. The government of UAE reserves the right to exercise penalties from a minimum of AED 500 to as much as 5 times the overdue VAT amount. On a scale of comparison, the standard 5% VAT can easily amplify to 25% in case of non-compliance or delayed response.

How can IBG help?

Investing in a reliable accounting solution that does all the paperwork, legal procedures and streamlined collection process can save a lot for UAE based company. At IBG Consulting, we are experts in company formation and business development solutions in the UAE, standing with a proud record of hundreds of satisfied clients from around the globe.

We will guide you through each stage, from implementation to the operational phase so you enjoy an effective VAT system supervised by our dedicated professionals at the most affordable rates you can find. If you are considering company incorporation solutions in UAE, contact our consultants for complete 3600 business solutions. Call us now to get a free quote and avail 30% off on our services as a part of our special new year offer.

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