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Difference Between Zero-Rated And VAT-Exempt

When charging Value Added Tax or VAT in UAE, rates that are charged greatly depend upon what the products or services are. The majority of items in the country are subject to five percent VAT, which is currently the standard rate. However, there are two other categories: VAT-exempt and zero-rated VAT.

These two categories often cause confusion to business owners as they appear like they’re one and therefore the same. They actually differ from one another as they differ in their treatment in terms of accounting. We will specialize in them for this text so as to assist you to avoid getting penalized for errors in VAT accounting and reporting.

VAT-exempt and Zero-rated VAT

The easiest way in explaining how zero-rated VAT differs from VAT exemption is by comparing the two categories.

What is zero-rated VAT in UAE?

Goods and services that are under zero-rated for VAT purposes are still goods that are taxable. However, the rate for VAT is charged at zero percent. Goods and services which fall into this category are as follows:

  • Products and services Export that are outside any GCC implementing state
  • Investment in jewelry, platinum, silver, and goal with greater than ninety-nine percent purity and tradable in the global markets
  • The first sale of a charitable real estate or building
  • Sale or rent of residential property for the First time after the completion of the conversion or construction
  • International transportation of goods and passengers including intra-GCC
  • Supply of products and services that are related to their means of transport, including transportation of products and passengers
  • Supply of means of air, land, sea transport for commercial transport of products and passengers of over ten people
  • Natural gas and crude oil
  • Medical equipment and medicines that aren’t listed within the Cabinet Decision
  • Healthcare or medical services that are aimed at treatment for residents including dental services
  • Preventative healthcare services (includes vaccinations)
  • School trips where the aim is within the curriculum and academic
  • After school activities that are supplied by teachers with no extra charge
  • Preschool education and nursery education
  • Higher education that’s provided by an establishment which is owned by the UAE government or one-half funded by the government, including all the related products and services Public and school education under-covered in Private with the exemption of higher education (includes all related products and services with are provided by the educational institution)

 

What is VAT exempt in UAE?

VAT exempt products and services aren’t taxable. No VAT should be charged. Goods and service falling into this category are as follows:

  • Life reinsurance and life insurance
  • Debt security or equity Issue, transfer, or allotment
  • Interest on any quiet lending including credit cards, loans, and finance leasing
  • Margin based products that don’t have a commission, discount, rebate, explicit fee, or similar
  • Bare land
  • Sale or rent of a residential property subsequent to the first supply
  • Domestic passenger transport (includes flights that are in UAE)

So, how do the two categories differ?

A business that sells goods and services which fall in the category, zero-rated for VAT purposes, will be able to benefit from VAT registration and being a business that’s registered for VAT. This is thanks to how it should affect both output and input tax:

  • VAT a business pays on products and services which it purchases is called input tax
  • When a business that’s registered for VAT charges VAT for a taxable sale, it’s mentioned as output tax. Businesses essentially collect the VAT that’s paid by customers then pass the quantity collected to the Federal Tax Authority when it pays the VAT bill during the tax return filing.
This has a crucial effect on the VAT return of the business:
  • If a business is registered for VAT and it pays more VAT for goods and services which it purchases than It gets on sales, this particular business is going to be able to reclaim the difference for what it’s paid also as what’s been collected.
  • For a business that’s registered for VAT and collects more tax on the sales instead of pays on goods and services that are for the business, this particular business has to pay to the FTA the difference.

The crucial thing to remember is the fact that items considered as zero-rated don’t incur a charge as VAT is at zero percent. When a business is merely selling zero-rated items, the VAT that’s paid on items it purchases are going to be more compared to the VAT that it collects from its clients or customers. The business will be able to claim this difference from the tax authority.

If you would like to understand more about the local tax regulations in UAE and want to stay updated with regulations of the UAE, Connect with the Experienced & regulated tax agents of VAT Registration in UAE today!

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