VAT Exemption and Zero Rated Supplies in UAE

Value Added Tax (VAT) is a consumption tax that is levied on the supply of goods and services in the UAE. Since the introduction of VAT in UAE, the Federal Tax Authority has made three categories based on the nature of the supplies. These three categories are zero-rated, exempt, and standard-rated.

Also read: Excise Tax Registration

The standard rate of VAT is 5%, which applies to most supplies made in the UAE unless they are specifically zero-rated or exempt. Zero-rated and exempt supplies are two different categories of supplies that are not subject to VAT in the UAE.

 This article will discuss the zero-rated and exempt categories of supplies as often people get confused about these two. If you have any doubts about the applicability of these two categories, you should always consult the tax consultants in the UAE with Farahat & Co.

They can help you identify the same and the implications of the VAT in all kinds of transactions happening in the UAE. 

What Kind of Transactions Come Under Zero-Rated Supplies in the UAE?

Zero-rated supplies are taxable supplies that have a 0% VAT rate, meaning that no VAT is charged on these supplies.

However, suppliers of zero-rated supplies can still claim input tax deductions, which are the VAT paid on their business purchases related to the zero-rated supplies.

This means that suppliers of zero-rated supplies can recover the VAT they incur on their costs, which reduces their tax burden and encourages them to make more zero-rated supplies.

Also read: VAT Deregistration Process and Penalty in UAE

The supplier of goods and services who produce zero-rated and Exempt Supplies in UAE VAT supplies must register their business for VAT with the FTA. The other general terms and conditions laid down by FTA for VAT apply to them.

They must file their returns on the prescribed dates, and they must undergo the process of VAT registration in the UAE or other emirates. 

As per the Federal Decree-Law (No 8) of 2017 Article no. 45, the supplies that have been declared zero-rated for VAT in the UAE are as follows:

1. Healthcare services that include primary and preventive healthcare services and related supplies.
2. All the educational services that include the goods and services provided for pre-schools, nurseries, primary school education, and higher education that are owned or funded by the federal or local government.
3. Supply of Crude oil
4. Supply of Natural gas
5. Precious metal investments
6. Residential buildings that are constructed within three years, whether through leasing or sale of it in part or incomplete.
7. The buildings are constructed for charity purposes, whether through rental or sale.
8. Commercial buildings are converted to residential properties either through rental or sale.
9. The goods and services that help transport goods or people by land, air, or sea.
10. Vessels and aircraft that are supposed to help in rescue operations by land or by sea.
11. The exports of products and services to the countries outside the GCC countries.

Registration Requirements for Zero-Rated Supplies

The Supplier is required to register for VAT if the value of their taxable supplies (including zero-rated supplies) exceeds AED 375,000 in 12 months, or if they anticipate that the value of their taxable supplies (including zero-rated supplies) will exceed AED 375,000 in the next 30 days.

However, a supplier may apply for an exemption from registration if they do not make any other supplies that are subject to the standard rate of 5%. If a supplier is granted an exemption from registration, they will not have to file regular tax returns and they will not be able to claim input tax credits.

What Is VAT Exemption in UAE?

Exempt supplies are non-taxable supplies that have no VAT rate, meaning that VAT is not charged on these supplies.

However, unlike zero-rated supplies, suppliers of exempt supplies cannot claim input tax deductions, which are the VAT paid on their business purchases related to the exempt supplies. This means that suppliers of exempt supplies cannot recover the VAT they incur on their costs.

A complete list of VAT-exempt supplies in the UAE is mentioned below-

1. The transportation happening within the UAE or the local transportation in the UAE.
2. Supply of bare lands.
3. The residential buildings are apart from the ones that have been regarded as zero-rated.
4. Financial services like insurance plans, life insurance reinsurance, and everything that is not being done for a discount, explicit fee, commission, rebate, or any other kind of compensation.

Apart from the categories mentioned above, the people who come to UAE as tourists or those who have a tourist visa are exempt from paying VAT.

As per the Federal Tax Authority, the tourists who shop in the stores located in any of the seven emirates of the UAE are eligible to receive eighty-five percent of the total amount they have paid for VAT.

VAT Registration for Exempt Supplies

The supplier is not required to register for VAT if they only make exempt supplies. In this case, the supplier is not eligible to claim tax credits on business expenses. An example of an exempt supply is renting out residential properties.

What Is the Difference Between Zero-Rated and Exempt Supplies?

The main difference between zero-rated and exempt supplies is the impact on the input tax recovery. Suppliers of zero-rated supplies can claim input tax deductions, while suppliers of exempt supplies cannot. This has implications for the pricing and profitability of the suppliers, as well as the tax revenue for the government.

The difference between zero-rated and exempt supplies in the UAE is summarized in the table below:

Criteria	Zero-rated supplies	Exempt supplies
Definition	Supplies that are taxable at 0% VAT rate.	Supplies that are not taxable for VAT purposes.
Examples	Exports of goods and services, certain healthcare services, first supply of new residential properties, etc.	Financial services, residential buildings (other than the first supply), bare land, local passenger transport, etc.
Input tax recovery	Suppliers can recover the input tax incurred on their business purchases.	Suppliers cannot recover the input tax incurred on their business purchases.
VAT registration	Suppliers must register for VAT if their taxable turnover exceeds AED 375,000 in 12 months, or if they expect it to exceed AED 375,000 in the next 30 days.	Suppliers do not have to register for VAT if all their supplies are exempt.
VAT return filing	Suppliers must file VAT returns with the FTA and declare their zero-rated supplies.	Suppliers do not have to file VAT returns if all their supplies are exempt.

How Can Farahat & Co. Help You?

Farahat & Co. has a team of experienced VAT consultants in UAE and well-trained staff who can help you file your VAT returns. They will sit with you and understand your business before finalizing the category of the goods and services that you are supplying. It will help avoid the unnecessary penalties that might be charged to firms with a zero-rated supply.

Failure to comply with the regulations can result in hefty fines and bankruptcy.

Therefore, get in touch with us today to know whether you need to register for VAT with FTA and, if yes, how to go about it.