What are Exempt Supplies in UAE VAT?

By definition, exempt supplies refer to ‘supply of goods or services for consideration while conducting business in the State, where no tax is due and no Input Tax may be recovered except according to the provisions of the Decree-Law’. In simple words, there are certain exempted goods or services notified in UAE executive regulations, on which VAT is not levied. This means, on supplying these goods or services, VAT is not charged.

On the other hand, businesses supplying these exempted goods or services will not be allowed to claim the input tax paid on your purchases. For example, you have paid VAT at 5% on the purchase of raw materials and assume, finished goods produced using raw material is exempted. Now, you will be not allowed to claim the 5% Input VAT paid on your purchases and it should be treated as a cost of the product.

Exempted goods and services list in UAE

Broadly, VAT exemptions in UAE are given for certain financial services, residential building, and supply of bare land, local passenger and so on. However, to consider supply as exempted from the VAT, the specific conditions mentioned in the UAE VAT Act and Executive Regulations need to be fulfilled.

The following is the list of exempted goods and services:

• Financial Services

The following financial services are under VAT exemption supplies:

• Financial services which are not conducted in return for an explicit fee, discount, commission, and rebate or any similar return are exempted.
• The issue, allotment, or transfer of ownership of an equity security or debt security are exempted from VAT Rate.
• The provision or transfer of ownership of a life insurance contract or the provision of re-insurance in respect of any such contract is under VAT exempted list.

This sounds good! But how do I know whether an activity or service which I am providing is a financial service? Is there any definition of financial services?

Yes, the UAE VAT Executive Regulation has not defined what is financial service is, but it has listed down the instances which amount to financial services.

Financial services are those services which are connected to dealing in money or its equivalent and the provision of credit. Exchange of currency issue, provision of any loan, advance or credit, the operation of any current, deposit or savings account etc. are few instances of financial services.

Kindly note, not all of the financial services discussed above are exempted from VAT. If any of these services are conducted in return for an explicit fee, commission, discount, and rebate or similar return as a consideration in respect of the supply of services, it would amount to a taxable supply.

• Residential Buildings

The supply of residential buildings is under VAT exemption subject to the following condition:

• The lease is more than 6 months or
• The tenant of the property is a holder of an ID card issued by the Emirates Identity Authority

The period of tenancy referred above will be identified with reference to the contractual period of tenancy and it will include any period arising from a right or option to extend the period of the tenancy or renew the tenancy.

Here, residential buildings refer to buildings intended and designed for the human occupation which includes principal place of residence, residential accommodation for students or school pupils, armed forces and police, orphanages, nursing homes, and rest homes.

Broadly, all residential accommodations which are within the definition of residential building and satisfying the above conditions are exempted from VAT.

Are there any buildings which are not considered as a residential building?

Yes, all the non-residential accommodations are not considered as residential buildings. The following are the instances of buildings which are not considered as residential buildings:

• Any place that is not a building fixed to the ground and can be moved without being damaged
• Any building that is used as a hotel, motel, bed and breakfast establishment, or hospital or the like
• A serviced apartment in which services in addition to the supply of accommodation are provided
• Any building constructed or converted without lawful authority In all the above cases, VAT @ 5% will be applicable.

In all the above cases, VAT @ 5% will be applicable.

• Bare Land

Here, ‘bare land’ means a land that is not covered by complete buildings or partially completed buildings or civil engineering works.

• Local Passenger Transport Services

The supply of local passenger transport services by way of transport by land, water or air from a place in the State to another place in the State will be exempted. The means of transport such as motor vehicle including taxi, bus, railway train, tram, monorail, ferry boat, abra or other similar vessel or similar means of transport, designed or adapted for the transport of passengers are exempted from VAT.

Even helicopter or aero plane designed or adapted for the transport of passengers and approved for transport of passengers in accordance with the Civil Aviation Act is exempted.

However, local passenger transport services in the context of a pleasure trip and local passenger transport service by aircraft which constitutes “international carriage’ as mentioned in UAE executive regulation will not be exempted and VAT @ 5% will be levied.

Related Articles:

• VAT Rate in UAE
• Zero-Rated Supplies in UAE VAT
• Difference between zero rate, exempt and out of scope supplies in UAE VAT

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In this article, let us understand the steps to be followed by a non-registrant to pay VAT in the FTA portal.

How to make VAT Payment in FTA portal

• Step 1: Log in to FTA e-Services portal
• Step 2: Click on the VAT tab as shown below:

• Step 3: Click ‘VAT 301- Import declaration form for VAT payment’

• Step 4: Fill in the Customs Authority, Customs Declaration Number and Declaration Date. Click Next.
• Step 5: The screen ‘About Declaration’ will open. The details of the customs declaration submitted earlier (Import date, destination, etc) will be automatically retrieved. Click Next.
• Step 6: The screen ‘Declaration details will open and the declaration details [for example, HS (Harmonized System) code, import value, customs duty, CIF (Cost, insurance and freight) value, etc] will be automatically retrieved. Click Next.
• Step 7: As the scenario of import requires payment of VAT, click ”Pay VAT button which will direct you to the e-Dirham gateway.

• Step 8: Once you are redirected to the e-Dirham gateway, you will be able to make the payment through an e-Dirham or non-e-Dirham card.
  

• Step 9: Once the payment is processed successfully, a confirmation message will appear on the screen and you will receive an email confirmation that the payment has been successfully completed. After this, the customs clearance process can be completed.
  

Hence, the process for payment of VAT on import has been made easy in the FTA portal. Non-registered importers can follow the above steps to pay VAT on import in the relevant scenarios.

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The Federal Tax Authority (FTA) has recently issued a public clarification on taxability of Dubai Owners’ Associations and Management Entities. In the clarification, FTA clarifies the significant impact of Law No. 6 of 2019 Concerning Ownership of Jointly Owned Real Property (“Law No. 6”) on the taxability of Owners’ Associations and Management Entities in the Emirate of Dubai.    

Law No. 6 was published on 4th September 2019 and became effective 60 days thereafter; that is, on 3rd November 2019. This Law applies to all Master Projects and Jointly Owned real estate property in Dubai. As per Article 49 of Law No. 6, all rights and obligations of Owners’ Associations which arose before the effective date of that Law had to be transferred to the Management Entities. Thus, Management Entity will supersede the Owners’ Associations in the business of managing the Jointly Owned Real Property.

Impact of Law No. 6 on the taxability of Owners’ Association

Dubai Owners’ Associations were required to apply for VAT de-registration before 4th of December 2019 (within 20 business days) as all the rights and obligations of Owners’ Associations were transferred to Management Entities, and thus, the Owners’ Associations are considered to be no longer making any taxable supplies.

 Obligations for Management Entities under the VAT Law

Management Entities are regarded as making supplies to the owners of Jointly Owned Real Property and required to fulfill VAT obligations in this regard, including VAT registration, the issuing of valid tax invoices and VAT reporting to avoid penalties such as:

1. Failure to Register under VAT law – AED 20,000
2. Failure to file correct Return – AED 3,000 for the first time, AED 5,000 in case of repetition
3. Failure to issue tax invoice/credit notes – AED 5,000 per document
4. The failure to settle the Payable 2% immediately, 4 % on 7th day & 1% on daily basis after one month up to 300%

It is important to note that Law No. 6 is only applicable for Dubai and Owners Association’s in other emirates are still required to be registered for VAT purposes.

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In our article ‘Tax Agent under UAE VAT’, we have learnt about tax agents. Tax agents are qualified and licensed persons who assist taxable persons in their compliance activities under VAT. Tax agents are registered with the FTA and taxable persons can appoint them to assist in fulfilling their tax obligations.

A tax agency is a firm of tax agents who register as an organisation to assist taxpayers in their compliance activities. A tax agency will consist of multiple tax agents. Note that all such tax agent firms have to register as tax agency with the FTA in order to be licensed to assist taxpayers in compliance. This is in addition to the individual tax agent license that the members of the firm may hold. In order to register as tax agency, the firm should have at least 1 tax agent linked to it.

Let us understand how to register as a tax agency under UAE VAT.

What is a Tax Agency?

A tax agency is a legal entity which is licensed to operate as a tax agency and has taken a tax agency registration with the FTA.

What are the conditions for registering as a Tax Agency?

The conditions to be fulfilled for tax agency registration are:

• Hold a business or trade license that allows the applicant to operate as a tax agency (usually issued by the Department of Economic Development), and
• Have professional indemnity insurance in respect of the tax agency business

What is the process for applying for registration as a tax agency?

Hence, every firm of tax agent should register as a tax agency with the FTA in order to be able to assist taxable persons in compliance activities under VAT. A unique identification number (TAN) will be granted to every registered tax agency under VAT. This guide on how to become a tax agency in UAE will be useful to such persons.

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Under VAT, certain violations of the provisions of the VAT Law can invite an administrative penalty. Administrative penalties are additional amounts payable by a person for breaching the provisions of the VAT Law. Let us understand the actions which invite administrative penalties under VAT in UAE and the amount of VAT penalty in each of these cases:

VAT compliant invoicing

VAT compliance begins with VAT invoicing. Every single invoice that you generate or transaction you record must be done in a VAT compliant way. With Tally.ERP 9, you don’t have to worry whether you have raised an invoice correctly or not.

All you have to do in Tally.ERP 9 is to enter TRN (UAE) or TIN (KSA) and the period. As soon as you start recording transactions in Tally.ERP 9, the VAT ready software maps all the data with VAT rules. Let us look at some examples to understand this better.

• Tally.ERP 9 applies VAT in invoices wherever applicable.
• Verifies whether the TRN/TIN are correct or not and raises alerts when they need to be corrected.
• Warns if manual alteration is done on already calculated values.
• Gives you the flexibility to add expenses or discounts with VAT implication.
• Shows how VAT calculation has been done for all the transactions.
• Invoices are matched in registers, profit & loss account, balance sheet and other reports.

Actions inviting Administrative Penalty under VAT

1. Failure by a Taxable Person to display prices inclusive of Tax

Every Taxable Person in UAE should display the price of taxable goods or services as inclusive of VAT, except in the following cases:

• The supply is for export
• The customer is a registrant
• Import of goods or services

If a Taxable Person omits to display the prices of goods or services as inclusive of tax, it will lead to an administrative penalty of AED 15,000.

2. Failure by a Taxable Person to notify the FTA regarding charge of Tax based on the margin

A Taxable Person should calculate Tax on the profit margin on supply of second-hand goods, antiques and collectors’ items such as stamps, coins, etc. Here, the profit margin is the difference between the purchase price and selling price of the goods.

An omission to notify the FTA regarding the charge of tax based on margin will lead to an administrative VAT penalty of AED 2,500.

3. Failure to comply with the conditions and procedures related to keeping goods in a Designated Zone or moving them to another Designated Zone

A Designated Zone is a VAT free zone which is considered to be outside the state of UAE for the purpose of VAT. As a result, on any transfer of goods between Designated Zones, VAT will not be levied. To know more about the conditions and procedures related to keeping goods in a Designated Zone or moving them to another Designated Zone, you can read our article VAT on Free Zones in UAE .

If a taxable person does not comply with the conditions and procedures related to Designated Zones, an administrative penalty of AED 50,000 or 50% of the tax chargeable as a result of the violation, whichever is higher, will be applicable.

4. Failure by a Taxable Person to issue a Tax Invoice or an alternative document when making any supply

Tax Invoice is the essential document to be issued by a registrant when a taxable supply of goods or services is made. To know more about Tax Invoice under VAT in UAE, you can read our article Tax Invoice.

A failure by a Taxable person to issue a tax invoice or alternative document for taxable supplies will invite an administrative penalty of AED 5,000 for each Tax Invoice or alternative document not issued.

5. Failure by a Taxable Person to issue a Tax Credit Note or an alternative document

A Tax Credit Note is a written or electronic document in which the occurrence of any amendment to a taxable supply that reduces or cancels the same is recorded.

A failure by a Taxable Person to issue a Tax Credit Note or alternative document, where applicable, will lead to an administrative penalty of AED 5,000 for each Tax Credit Note or alternative document not issued.

6. Failure by a Taxable Person to comply with the conditions and procedures regarding issue of electronic Tax Invoices and electronic Tax Credit Notes

A Taxable Person can issue a Tax Invoice or Tax Credit Note electronically, provided:

• a. The Taxable Person must be capable of securely storing a copy of the electronic Tax Invoice as per the record keeping requirements
• b. The authenticity of origin and integrity of the content of the electronic Tax Invoice or Tax Credit Note is guaranteed

If a Taxable Person does not comply with these conditions for issue of electronic Tax Invoices or Tax Credit Notes, it will invite an administrative penalty of AED 5,000 for each electronic Tax Invoice or Tax Credit Note for which the conditions are not met.

Hence, tax payers should take note of the high administrative penalty when certain provisions of the VAT Law are violated and ensure that these are noted and avoided.

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In line with the Cabinet Decision No. 65 of 2020 on Fees for Services provided by the Federal Tax Authority issued in October 2020. The Federal Tax Authority (FTA), and in coordination with the Ministry of Finance (MOF) will start receiving applications for the issuance of tax certificates via its website as of 14th November 2020. There are two categories of tax certificates

which will be issued to Legal and Natural Persons:

• Tax Residency Certificate: a certificate issued by the FTA upon    request to enable applicants to benefit from Double Tax Avoidance Agreements (DTAA) on income signed by the UAE.

• Commercial Activities Certificate: a certificate issued by the FTA to enable applicants to refund VAT paid outside the UAE, whether or not DTAAs are applicable.

The new service provides advantages and ease for the issuance of certificates to those registered in the tax system, as all their data is available in the FTA database, so they can apply for Tax Certificates through direct and quick digital procedures.

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The UAE has reiterated that it doesn’t t have any plans at the moment to raise its 5 per cent value added tax (VAT) after Saudi Arabia tripled the levy and Oman said it plans to start imposing it from April.

The second-biggest Arab economy is continuing to modernize its tax policies for economic growth, the state-run news agency reported, citing Saeed Rashid Al Yateem, assistant under-secretary of resources and budget sector at the Ministry of Finance. The UAE implemented 5 per cent VAT at the start of 2018.

VAT revenue in the first eight months of the year was Dhi1.6 billion ($3.2 billion) and excise tax collection at Dh1.9 billion, according to WAM.

News Courtesy : Gulf News

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In business, return of goods by customers is common. The return of goods can be of the entire quantity supplied or of a partial quantity. This could be due to various circumstances, such as goods being damaged during transit, goods not received as per the specification, etc.

With the introduction of VAT in UAE, the tax aspect on the goods supplied and returned also comes into play. When the goods are sold, VAT is charged at the standard rate. When the goods sold are returned by the recipient partially/fully, the VAT charged on the goods returned has to be reversed. The document to be issued by a supplier when goods sold are returned by a customer, is called Tax Credit Note. A Tax Credit Note serves the purpose of reducing the tax payable to the FTA by the supplier on the supply by as well as reducing the input tax eligible to be recovered by the recipient on the supply. Let us understand how a supplier can issue a Tax Credit Note for return of goods by customers.

Example: Ali Automobiles, a registrant in Dubai, supplies 10 cars @ AED 50,000 each to Fatima Transports, a registrant in Ajman. VAT @ 5%, amounting to AED 25,000 has been charged on the supply. Out of the cars supplied, Fatima Transports returns 2 cars as they are damaged during the transportation. The Tax Credit Note to be issued by Ali Automobiles for return of 2 cars by Fatima Transports appears as shown below:

A Tax Credit Note is an important document under VAT in UAE. The VAT Law has laid down the details that are mandatorily required in a Tax Credit Note. Registered businesses should ensure that these details are given in every Tax Credit Note issued.

Let us now answer some FAQs that businesses have, with respect to Tax Credit Note.

FAQ 1: Should the Tax Credit Note necessarily contain details of the sales invoice to which it relates?

Answer: Yes, a Tax Credit Note should provide the details of the Tax Invoice, i.e. the supply to which it relates. In the above Tax Invoice, the ‘Buyer’s Ref’ field shows the details of the Tax Invoice to which the Tax Credit Note relates.

FAQ 2: Is there a time limit within which a Tax Credit Note relating to a supply has to be issued?

Answer: No, no time limit has been laid down for issue of a Tax Credit Note for a supply.

FAQ 3: Should a Tax Credit Note necessarily contain the reason for its issue?

Answer: Yes, a Tax Credit Note should contain a brief explanation of the circumstances leading to the issue of the Tax Credit Note.

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Continuous supplies refer to supply of goods or services on a recurrent basis, under a contract for which the supplier invoices the recipient on a periodic basis and receives the payment before the completion of the contract. This usually applies to a contract having a longer duration. This is also known as progressive billing because series of invoices are prepared at different stages of the project to seek payment for the percentage of work that has been completed.

The time of supply for continuous supplies or contract which involves progressive billing will be the earliest of the date of tax invoice, the due date of payment as shown on the tax invoice or the date of receipt of payment.

Note: This is applicable only if periodic payments or consecutive invoices does not exceed one year from the date of the provision of such goods and services.

The introduction of VAT in UAE has been a major change for almost every kind of business in UAE. However, for the gold and diamonds sector, which is one of the vital national economic sectors, the introduction of VAT has hit the sector badly. Under VAT, businesses purchasing gold and diamonds were required to pay VAT at the time of purchase. This VAT paid could be recovered by them only at the time of filing of returns. Due to this, businesses dealing in gold and diamonds were facing severe cash flow and liquidity issues. The FTA, having recognized these issues, has decided to apply the reverse charge mechanism on the purchase of gold and diamonds by registered businesses. Let us understand more about VAT applicability on supply of gold and diamonds in UAE.

VAT on gold and diamonds

When a business supplies gold and diamonds to a person registered under VAT, who is purchasing the goods for resale, or to produce or manufacture gold and diamond-based products, the supplier is not required to charge VAT on the supply. Instead, the recipient has to account for the VAT due on the supply and report this VAT due in their VAT return. The recipient can also recover VAT on the supply in the same VAT return, provided it meets the conditions for input tax recovery. 

For example: A One Gold and Diamonds LLC supplies gold for value of AED 10,000 to a registrant, Razzaq Jewellery, who is purchasing the gold for resale purpose.

Here, A One Gold and Diamonds is not required to charge VAT @ 5% on the supply. Instead, Razzaq Jewellery has to account for the VAT due, i.e. AED 500 and report the same in their VAT return. Razzaq Jewellery can also recover this VAT in the same VAT return. This means that in effect, Razzaq Jewellery does not have to incur any cash outflow on account of the purchase of gold.

New rule for VAT on gold and diamonds

Previously, when a business registered under VAT supplies gold and diamonds to another registrant, the supplier was liable to collect VAT on the supply from the recipient. The recipient was eligible to recover input tax on the supply only at the time of filing of VAT return. This led to cash flow issues for registered businesses purchasing gold and diamonds.

Which goods will be covered under this scheme?

The goods covered under this scheme are:

• Gold
• Diamonds
• Products where the principal component is gold or diamonds. For example: Jewellery

Hence, the change in VAT applicability on supply of gold and diamonds among registered businesses is certainly a relief to the sector. The earlier applicability of VAT on forward charge, wherein, VAT is collected by the supplier at the time of supply, led to cash blockage for businesses purchasing gold and diamonds. This has now been changed to reverse charge, wherein, the supplier will not collect VAT on the supply and the recipient can report the VAT due on the supply as well as recover input tax on the supply in the same VAT return. This ensures that in effect, there is no cash blockage on account of VAT for businesses purchasing gold and diamonds. In our next article, we will learn about the conditions to be satisfied to be eligible for this scheme and the exceptional scenarios where this scheme is not applicable.

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VAT on Supply of residential buildings in UAE is, based on whether the supply is the first supply or a subsequent supply. Let us understand what is meant by the term ‘residential building’ and the VAT treatment of supply of residential buildings.

Residential Buildings

A residential building is a building which is intended and designed for human occupation. This includes:

• Any building or part of a building that a person occupies, or that it can be foreseen that a person will occupy, as their principal place of residence
• Residential accommodation for students or school pupils
• Residential accommodation for armed forces and police
• Orphanages, nursing homes and rest homes

A residential building is not:

• Any place that is not a building fixed to the ground and which can be moved without being damaged, such as a movable home
• Any building that is used as a hotel, motel, bed & breakfast establishment, or hospital
• A serviced apartment for which services in addition to accommodation are provided
• Any building constructed or converted without lawful authority

Note: A building is still considered to be a residential building if a small proportion of it is used as an office or workspace by the occupants, if it includes garages and gardens used together with the property, or if it includes any features that may be said to comprise part of a residential building.

First Supply of a Residential Building

The ‘first supply’ of a residential building includes a supply of the building by either sale or lease. The first supply of a residential building will be zero-rated under VAT in UAE. However, the condition for this is that the first supply should be made within 3 years of the building’s completion date. Since the first supply of a residential building is zero rated, the VAT incurred on costs relating to the first supply of the building can be recovered in full.

Note, this is regardless of who the building is supplied to (a registered person, a non-registered person, a related party, etc.). The important point to ensure here is that the first supply should be made within 3 years of the building’s completion.

What is Completion Date?

The completion date of a building is:

• The date the building is certified as being complete by an appropriate qualified authority or
• The date the building is occupied, whichever is earlier

Subsequent supplies of residential buildings

Any subsequent supply of a residential building after the first supply, is exempt from VAT. Note that even if a subsequent supply happens within 3 years of the building’s completion, it will be exempt from VAT.

Since subsequent supplies of residential buildings are exempt from VAT, VAT paid on costs incurred by the supplier related to the subsequent supply will not be eligible for input tax recovery.

For example: VAT paid on agent fees, costs related to general upkeep and maintenance of the property, etc. for the subsequent supply, will not be eligible for input tax recovery.

Hence, the VAT treatment of residential buildings depends upon whether the supply is the first supply or a subsequent supply. If the supply is the first supply of the residential building, which is made within 3 years of the building’s completion, it will be zero rated. However, if the supply is a subsequent supply of the residential building, even if it is made within 3 years of the building’s completion, it will be exempted from VAT.

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