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The Difference Between Zero-Rated VAT and Exempted VAT

There are still many people who are trying to grasp the terminology when it comes to value-added tax (VAT), and two of those terms are “zero-rated VAT” and “exempted VAT”.

What’s confusing about this is they seem and sound like they mean the same thing, but they really don’t. The breakdown of the two terms in a VAT in UAE is discussed below for further information.

Zero-Rated VAT Breakdown

Basically, all the goods and services that are exported to a Gulf Cooperation Council (GCC) country that doesn’t have VAT just yet is subjected to zero rating of VAT.

Some instances are the international transportation of passengers and goods. This also includes any transfer that starts or ends in the country or even cross any of part of it.

With this, zero-rated VAT simply means that the retail sale is not taxed by the government. Although this is so, the government allows credits for the VAT paid on inputs. The price of a good is reduced when zero-rated VAT is applied. Important goods, like prescription drugs, food, and utilities, are commonly placed under zero-rated VAT by the government to help low-income households.

Exempted VAT Breakdown

The exempt VAT is when a good is not taxed by the government and there are no credits for VAT paid on inputs to be claimed.

VAT exemptions can sometimes be the cause of the rise in prices. Because of this, the government only uses it for goods or services wherein it is difficult to define VAT, like insurance and financial services.

Difference Between Zero Rated and Exempt VAT in UAE

Zero rated VAT is just applied to goods that are taxable at only 0% and allows businessmen to claim the VAT paid for inputs. On the other hand, exempted goods and services are those that are not at all taxable.

List of Zero-Rated and Exempted Goods and Services

There are a number of zero-rated and exempted goods and services that are based on the laws that were issued by the government in 2017 before the implementation of VAT.

With the zero-rated goods and services, Article 45 of Federal Decree-Law Number 8 of 2017 has stated 14 items that are under the zero-rated VAT.

List of 14 Items under Zero-Rated VAT 

(a) Direct or Indirect Exports, which the above-mentioned exportation to GCC states that do not have VAT yet;
(b) International Transport, which basically means international airfares;
(c) Air Passenger Transport;
(d) Supply of Air, Sea, and Land Means of Transport that means the supply of transport for passengers and goods using air, sea, and land means;
(e) Goods and Services Related to the Supply of the Means of Transport, this talks about the goods and services supplied for the purpose of the operation, repair, maintenance, or conversion of those means of transport;
(f) Aircraft and Vessels for Rescue, which is when rescue and assistance are the purposes of the use of aircraft and vessels;
(g) Supply of Goods and Services Related to the Transfer of Goods or Passengers, which pertains to the supplication of goods and services for the sole purpose of providing them to be consumed on board;
(h) Investment in Precious Metal, which talks about the precious metals that are classified as for investment purposes;
(i) Sale of the Residential Building, which is about the  first three years of completion of a building;
(j) Charitable Building Supplies, which pertains to the buildings that are for charities;
(k) First Supply for Residential Building, which means the first supply of buildings that are converted from non-residential to residential;
(l) Oil and Gas, which is crude oil and natural gas;
(m) Educational Services, which are the goods and services for federal- or government-owned nurseries, preschool, elementary, and higher education institutions; and
(n) Healthcare Services, which is the preventive and basic healthcare supply of services and goods.

On the other hand, the list of VAT-exempted goods and services is short as per Article 46 of the Federal Decree-Law Number 8 of 2017, and it is as follows:

(a) Financial services;
(b) Supply of residential buildings through sale or lease;
(c) Supply of bare land; and
(d) Supply of local passenger transport.

VAT Consultants in UAE

It is not an easy task to deal with VAT even if it has been almost two months. There can still be confusion and things that are not that simple to understand, especially because most people have not dealt with taxes before VAT in UAE. Because of this, we at Farahat & Co. are extending our hands as one of the leading VAT consultants in the UAE to help you ensure that you are complying with the laws and accounting for VAT correctly.

You can book a consultation with us right now to find out more.

Ervee is a CPA with international experience in Tax and Accounting. He has over 12 years of experience in accounting and bookkeeping and over a year in VAT implementation, registration, and accounting in UAE. He regularly drives out inefficiencies in company operations and loves the challenge of helping clients find additional ways for an easier and improved compliance and verification of transactions.