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Resources VAT Basics

Introducing the concept of VAT will significantly alter various accounting operations in a business. Following are a few basic topics on VAT and how they impact businesses and consumers.

Understanding Value Added Tax

How does VAT work?

Headquarter business

Why is the VAT being introduced?

Registering for VAT

VAT Rates

Understanding Value Added Tax

Any fee charged by a government on income generated, goods, corporate revenues, public-private service delivery, and/or any other transactions to fund government expenditures and public services, is called a tax. There are 2 major categories of tax:


A direct tax is collected directly by the government from the taxpayer.

An indirect tax is collected by the government through an intermediary, who collects the tax on behalf of the government from the taxpayer.

Why is the VAT being introduced?

How does VAT Works

Let us consider the following example to see how the VAT system works:

Consider a manufacturer who produces Microwave oven sets and sells a unit to a wholesaler for AED 500. Under the new tax system, the manufacturer collects a VAT of 5% (AED 25) from the wholesaler on behalf of the government. The wholesaler then pays a total amount of AED 525

The wholesaler increases the selling price to AED 1000 and sells it to a retailer. The wholesaler collects a VAT of 5% (AED 50) from the retailer on behalf of the government, while also receiving a refund of the VAT paid to the manufacturer in the previous step. The retailer pays a total amount of AED 1050.


The retailer further increases the selling price to AED 1500 and sells it to the end customer. The retailer collects a VAT of 5% (AED 75) from the end customer, while also receiving a refund of the VAT paid to the wholesaler in the previous step.


The end customer pays a total amount of AED 1,575 for the microwave oven set

Why is the VAT being introduced?

VAT allows governments to enhance and diversify their sources of income to continue providing a good standard of living for UAE residents. The implementation of VAT is expected to generate AED 12bn of revenue in its first year and up to AED 20bn in the second year.

Registering for VAT:

Registration for VAT can be both mandatory or voluntary, depending on the business revenues generated.


VAT registration of a business is mandatory if the total value of their taxable sales and imports within the UAE exceeds the mandatory registration threshold of AED 375,000 for the previous 12 months or within the upcoming 30 days.


VAT registration for any business is mandatory if the total value of their taxable sales and imports within the UAE exceeds the voluntary registration threshold of AED 187,500 for the previous 12 months or within the upcoming 30 days.

Startups and small-scale businesses can register voluntarily if their expenses exceed the voluntary registration threshold, thereby making them eligible for tax credit.

VAT Rates:

The VAT rate is fixed at 5% for most goods and services except for these exempted or 0% tax categories:

International transportation.

Goods and services exported outside the GCC.


Undeveloped land.


Certain financial services.

Certain investment-grade precious metals (e.g. gold and silver of 99% purity).


Newly constructed residential properties sold within 3 years of construction.


Residential properties.


Certain education and healthcare supplies.

Public transport.


Life insurance.

Excise Tax

Which products are subject to excise tax?

Carbonated drinks

All aerated beverages except for unflavored aerated water. Products used for making aerated beverages, including concentrates, powders, gels, and extracts will also be considered excise goods.

Tobacco and tobacco products
Tobacco products generally comprise of Cigarettes (of all types including Bidis (pronounced “bee-dees” which are small, thin hand-rolled cigarettes ), Cigars, Cigarillos and little Cigars, Chew-able tobacco, dis-solvable tobacco, Electronic cigarettes/vapes, Hookahs incl. Sheehsha, Pipes, and Smokeless tobacco including snufs
Energy Drinks:
Certain beverages include energizers which provide mental and physical stimulation, such as caffeine, taurine, ginseng, and guarana. Any concentrate, powder, gel, or extract that is made into an energy drink is also subject to excise tax.

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