The Value Added Tax, or VAT, is a tax on consumption & is collected on business transactions and imports. The basic principle is to charge VAT at each stage in the supply of goods and services (output tax). If the customer is registered for VAT and uses the supplies for business purposes, he will receive credit for this VAT (input tax). The broad effect is that businesses are not affected and VAT is actually borne by the final consumer.
How does VAT work?
Taxable persons charge & add VAT to the value of supplies (goods & services) they sell. Such Taxable persons can reclaim VAT incurred on goods and services purchased for business purposes (subject to certain restrictions) such as the purchase of raw materials & other consumables used for business purposes.
A business must register for VAT if their taxable supplies and imports exceed the mandatory registration threshold of AED. 375,000. Furthermore, a business may choose to register for VAT voluntarily if their supplies and imports are less than the mandatory registration threshold, but exceed the voluntary registration threshold of AED. 187,500.
When any registered person imports, acquires or buys goods or services from abroad, that person must pay any VAT that is due. The mechanism for this depends on whether the goods or services are received from the GCC and the specific rules in each member state. Reverse charge is a mechanism under which VAT is required to be paid for the goods or services by the recipient instead of the supplier when the supplier is not a resident in the member state where the supply takes place. When the reverse charge is applied, the recipient of the goods or services makes the declaration of both their purchase (input VAT) and the supplier’s sale (output VAT) in their VAT return. In this way the two entries cancel each other from a cash payment perspective in the same return.