Difference between Zero Rated VAT and Exempted VAT in UAE

The new taxation regime called Value Added Tax will be implemented in UAE from 1st January 2017. It is one of the biggest taxation reforms till now. With the introduction of new taxation regime, people are facing the number of challenges in understanding the various terminologies and concepts of this regime. One such concept is the difference between zero-rated supplies and the exempted supplies.

Zero Rated Supplies

Zero- rated goods are the supplies on which the output tax is charged at 0%. This means that the taxpayer can claim input tax for his business and tax invoices issued must show Vat at the zero rate. Let us understand this further with a help of an illustration.

Mr. A is making a supply of two goods. On one of them, 5% VAT is levied while the other is zero rated good i.e 0% VAT is levied on it. In this case Mr. A is empowered to claim the VAT refund for VAT paid on all the business inputs.

Further following are the categories of supplies which will be zero rated under the VAT regime-

  • Exports of goods and services to outside the GCC
  • International transportation, and related supplies
  • Supplies of certain sea, air, and land means of transportation (such as aircraft and ships)
  • Certain investment grade precious metals (e.g. gold, silver of 99% purity)
  • Newly constructed residential properties, that are supplied for the first time within 3 years of their construction
  • Supply of certain education services, and supply of relevant goods and services;
  • Supply of certain Healthcare services, and supply of relevant goods and services.

Exempted Goods

Exempt supplies are supplies that are exempt from tax. There’s no output tax, no input tax, and no tax invoices. Tax doesn’t apply at all in this case. Thus a person cannot claim VAT paid on business inputs. Let us further understand this with the help of an illustration

Mr. A is supplying two goods. One good is tax exempted and on the other good 5% VAT is applicable.  Mr. A will be able to pay taxes and claim refund on the goods taxed at 5%. However, he will not be able to claim the refund of tax paid on the business inputs of the exempted goods.

Further the following categories of supplies will be exempt from VAT:

  • The supply of some financial services (clarified in VAT legislation)
  • Residential properties
  • Bare land; and
  • Local passenger transport

Difference between Exempted Supplies and zero rated Supplies

Zero Rated Supplies Exempted Supplies
These supplies are taxable supplies on which 0% VAT rate is applicable. These supplies are non-taxable supplies.
A vendor which is not registered under VAT regime cannot make zero rated supplies. The supply of exempted goods is similar to the supply made by the vendors which are not registered under the VAT regime.
Input tax deduction can be claimed for the taxes paid on the business input.  

Input tax deduction cannot be claimed for the taxes paid on the business input.

It does form a part of the taxable supplies in order to ascertain the threshold limit. It does not form a part of the taxable supplies in order to ascertain the threshold limit
It requires detailed documentary proof. It does not require any documentary proof as the supplier can’t make any tax claims.

 

 

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