What is VAT?

Value Added Tax or VAT can be described as an indirect tax levied on the domestic consumption of goods and services. The exemption to these goods and services are goods that are zero-rated or goods that are exempted. This tax is added at each stage of the supply chain. The Value Added Tax is a consumption tax as this tax is ultimately borne by the customers.

The goods and services that are taxable are subject to a flat rate of 5% VAT. The government has decided upon a list of taxable goods and services. The rest goods and services are zero-rated or exempted.

Zero Rated

Zero-rated VAT refers to goods and services that are taxable but at a rate of 0%. This means that while the goods or services are subject to VAT, the tax rate applied is zero. Importantly, businesses that sell zero-rated goods can still claim back any VAT they’ve paid on their inputs.

Goods and Services under Zero Rated Tax

Article 45 of Federal Decree-Law Number 8 of 2017 states that there 14 goods and services that are subject to zero-rated VAT. These are:

• Direct or Indirect exports
• International Transport
• Air Passenger Transport
• Supply of Air, Land and Sea Means of Transport
• Goods and Services related to the Supply of Means of Transport
• Aircraft and Vessels of Rescue
• Supply of Goods and Services related to the Transfer of Goods and Passengers
• Investment in Precious Metals
• Sale of Residential Building
• Charitable Building Supplies
• First Supply for Residential Building
• Oil and Gas
• Educational Services
• Healthcare Services

Implications for Businesses

1. Input Tax Recovery: Businesses can recover VAT on expenses related to zero-rated goods, which helps maintain cash flow.
2. Compliance Requirements: Even with a zero-rate, businesses must still keep records and report sales on their VAT returns.
3. Competitive Pricing: Since the effective tax rate is zero, businesses can offer more competitive pricing on zero-rated items.

 Exempted

Exempted VAT refers to goods and services that are not subject to VAT at all. Businesses selling exempt items do not charge VAT on sales, and they cannot claim back VAT on their inputs.

Examples of Exempted VAT

Common examples of exempted goods and services include:

• Financial services (like insurance and banking)
• Education services (schools, universities)
• Health services (medical treatments)
• Certain residential property transactions

Implications for Businesses

1. No Input Tax Recovery: Businesses cannot reclaim VAT on their inputs, which can affect their cash flow.
2. Limited VAT Compliance: Since exempt businesses do not charge VAT, they are often exempt from filing VAT returns, reducing administrative burdens.
3. Potential for Competitive Disadvantage: Businesses that deal exclusively in exempt items may find it challenging to compete with those that sell zero-rated or taxable goods

Differences Between Zero-Rated VAT and Exempted VAT