Impact of VAT in UAE | Help with TAX in UAE | VAT consultants in UAE

How does VAT affect the behavior of small companies?

How does VAT affect the behavior of small companies: VAT (Value Added Tax) is used as primary indirect tax by the countries all over the world. The countries have thresholds depending on turnover, below which business do not need to register for VAT. The countries that implemented VAT recently have high threshold.

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The growth and development of small business affected by threshold

The small companies or businesses respond to VAT threshold due to the increased taxation and increased cost of compliance. The businesses below the turnover threshold also need to register for VAT, thus is not mandatory to do so. This is happens when a firm has large purchases of intermediate inputs, and/or they can pass most of the VAT on output onto the purchaser.

The companies keep the turnover below the threshold by reducing sale or by misreporting the sales. This is how bunching occurs. The companies respond to the threshold by making possible irregular changes in production factors.

Bunching will affect the growth of small companies. VAT threshold acts as a hindrance for the growth because the companies will try to keep the income below the threshold for a long period of time to avoid VAT.

The above report shows that the VAT affect the behavior of small companies in a significant way.

Difference between VAT & Sales Tax | VAT in UAE

Difference between VAT & Sales Tax: Difference between VAT & Sales TAX: The Value Added Tax (VAT) and Sales Tax both are consumer tax, which means that both have to be paid after purchase of a product. VAT is an indirect tax while sales tax is a direct tax. At the different stages of goods production and services VAT is levied. The VAT is applicable for both the import goods and local products. VAT emerged as one of the most efficient way to generate revenue in most of the countries because of it neutral and transparent nature.

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VAT is a indirect and multilevel tax, It is charged each and every point of production and distribution, when the transactions take place. VAT is a destination based tax.

In VAT, the registrants have to pay the tax to government in every month which they collected from consumers, deduct what they paid to vendors if any. By a particular date the payment details should be provided to Commercial Taxes Department (either monthly or quarterly, depending on the state).

As compared to VAT, sales tax is imposed on the retail sale of goods. Sales tax is imposed on the total value of goods and services purchased. At the time of purchase of services and products sales tax is imposed. The consumer knows how much they are going to pay as sales tax, because it is easily calculated. Sales tax depends upon states, cities or local municipalities and what types of merchandise or services.

Sales tax is paid by end consumers on their consumption. The sales tax is transferred to the government at the final stage by the seller. Until the final sale is made to the customer Tax jurisdictions do not receive.

Strict rules are there to be followed in sales tax. It is easy to collect and have high compliance rate. Sales tax evasion is very high.

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Advantages & Disadvantages of VAT

VAT is tolerated by final consumers, so it is a consumption tax. Companies do not take the burden of VAT. Through a system of deductions it is claimed fractionally, where taxable persons can abstract the VAT liability amount which they paid to other taxable persons on business activities purchase.

Advantages of VAT

⚫ As VAT is a consumption tax the revenue generated will be constant.
⚫ Compared to other indirect tax VAT is easy to manage.
⚫ Due to catch-up effect of VAT, it minimizes avoidance.
⚫ Huge amount of revenue is generated on a low tax rate through VAT.
⚫ As the VAT is collected in small installments so the consumers has minimum burden.
⚫ VAT is a neutral tax so it can be imposed on all types of business.

Disadvantages of VAT

⚫ As the VAT is based on full billing system, VAT implementation is expensive.
⚫ It is not a simple task to calculate value added in every stage is not an easy task. Thus VAT is difficult to understand.
⚫ VAT is regressive in nature. Thus it will affect the poor people more than the rich because they spend more proportion of their income.
⚫ All purchase and sales records should be maintained which will cause increased in compliance cost.
⚫ The consumers need to be cognizant for successful implementation of VAT otherwise tax negligence will be extensive through fake invoices.

Impact of VAT on Real Estate Sector in UAE

The implementation of VAT in UAE will effect on real estate development, sales, purchase and leasing of property and also on construction in a different manner and probably highly complex.

VAT on sale of commercial / residential properties

According to the UAE government the sale or lease of residential properties are exempt from VAT, however the sale of commercial properties will attract VAT.

VAT on leasing of commercial / residential properties

As per the government norms VAT will not be imposed on leasing of residential properties though the VAT is applicable on commercial leases.

This will make landlords to pass the VAT on to renters which will result in the increase in rental cost.

VAT on real estate broker commissions

The real estate brokerage services are expected to be at standard VAT. What matters is how the commission, which is generally shared with an individual agent, will be affected. In some cases the commission from sales is distributed among the individual agents, will influence on the cash flow of the business. The VAT is applicable to the shared commissions as in whole or makes administrative changes not to provide for VAT and submission but also how comission is shared.

VAT on the construction industry

In the construction sector most of the contracts are for a number of years and the signed contracts may not have prepared in the premises of VAT, which will raise an avoidable question who has to bear the VAT. There is possibility that the UAE government will allow the previously signed contracts to move forward. The other problem is the main contractors are doubtful in recovering the cost they experienced because of the sub-contractors who are below minimal annual income for VAT registration. Hence the main contactors need to restructure to provide non-recoverable VAT cost or the sub-contractors need to temporarily register for VAT to become commercially competitive.

VAT for real estate developers

The impact of VAT will be different for the developed commercial property, residential property and the sale of undeveloped property. The bare land is exempt of VAT. Real estate developers keep in mind the difficulties arising due to the mixed development of commercial and residential leasing.