Difference between Zero-rated and Exempted Supplies under VAT in UAE 

Value Added Tax (VAT) in the United Arab Emirates is a consumption tax levied on most goods and services at a standard rate of 5%. However, certain categories of supplies are not subject to VAT. While zero-rated supplies are technically taxable but charged at 0%, allowing for input tax recovery, exempt supplies are entirely outside the scope of the VAT system. This article explores the concepts of zero-rated and exempt supplies, which captures their differences in UAE.

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What is Zero-rated supplies in UAE?

Zero-rated supplies, as defined by Federal Decree-Law No. (8) of 2017 on Value Added Tax (UAE VAT Law), are taxable supplies for which a VAT rate of 0% VAT is applied. This means that although VAT is technically levied on these supplies, the final price to the customer reflects no VAT charge. However, businesses making zero-rated supplies are entitled to recover the input tax they incurred on purchases related to those supplies.

List of Zero-rated Goods and Services under VAT in UAE

As per Article 45 of the Federal Decree-Law no(8) of 2017 on Value Added Tax, zero-rated supplies are followed:

• Exports: Anything you sell and send outside the UAE (including indirect exports).

• International Transportation: This covers passenger and goods transportation that starts, ends, or passes through the UAE, including related services. This includes international flights and certain passenger transport within the UAE.

• Means of Transport: This includes the supply of airplanes, ships, and other vehicles used for passenger and goods transport (as defined by UAE regulations). It also covers related supplies for their operation, repair, and maintenance.

• Rescue and Assistance: Supplies for aircrafts and vessels specifically designed for air and sea rescue operations.

• In-flight Supplies: Food, drinks, and other items consumed onboard airplanes, ships, and other approved transportation during travel.

• Investment Precious Metals: Gold, silver, and other precious metals meeting specific purity standards for investment purposes (as defined by UAE regulations).

• New Residential Buildings: The first sale or lease of newly built residential buildings within 3 years of completion (as per specific controls).

• Charities: The first sale or lease of buildings specifically used by charities (as per specific controls).

• Converted Residential Buildings: The first sale or lease of buildings converted from non-residential to residential use (as per specific controls).

• Oil and Gas: The supply of crude oil and natural gas.

• Educational Services: Services provided by nurseries, preschools, schools, and higher education institutions owned or funded by the government (as per specific controls).

• Basic Healthcare: Preventive and basic healthcare services provided by approved entities (as per specific controls).

What is Exempt Supplies in UAE?

Exempt supplies, unlike zero-rated supplies, are entirely outside the scope of VAT in the UAE. This means that no VAT is levied on these supplies, and businesses making exempt supplies are not entitled to recover any input tax they may have incurred on related purchases.

List of Exempted Goods and Services under VAT in UAE

In  Article 45 of the Federal Decree-Law no(8) of 2017 on Value Added Tax, the following supplies are exempted from tax:

• Financial Services: Services offered by banks, investment firms, and other financial institutions, as defined in the UAE VAT regulations. This could include things like loans, investment products, and money transfers.

• Resale of Existing Homes: This covers the sale or lease of any residential property that's not considered a new build (first supply) under zero-rating (within 3 years). So, buying a used apartment and selling it later would be an exempt supply.

• Bare Land: The sale or lease of vacant land, meaning any land without a building on it.

• Local Public Transport: This includes bus services, metro systems, taxis, and any other form of public transportation operating within the UAE.

What is the Difference between Zero-rated supplies and Exempt Supplies in UAE VAT system?

While both zero-rated and exempt supplies under UAE VAT involve no final VAT charge to the customer, key differences exist. Zero-rated supplies technically attract a 0% VAT rate, allowing businesses to recover input tax on related purchases, making them competitive in the global market. In contrast, exempt supplies fall entirely outside the VAT scope, meaning no VAT is levied and no input tax can be claimed, keeping transactions VAT-neutral. This distinction is crucial for businesses to ensure accurate VAT treatment, optimize input tax recovery, and maintain proper compliance.

Benefits of Understanding Zero-rated and Exempt Supplies

Understanding the distinction between zero-rated and exempt supplies offers several benefits for businesses operating in the UAE:

• Accurate VAT Compliance: Businesses can ensure they are applying the correct VAT treatment to their transactions, avoiding potential tax liabilities and penalties.

• Efficient Input Tax Recovery: Businesses making zero-rated supplies can claim back the input tax they incur, reducing their overall tax burden.

• Pricing Strategy: Knowing which supplies are zero-rated or exempt allows businesses to set accurate pricing structures that reflect the applicable VAT treatment.

• Record Keeping: Businesses can maintain better records by segregating zero-rated and exempt supplies from standard-rated supplies.

Conclusion

Understanding the distinction between zero-rated and exempt supplies under UAE VAT is crucial for businesses to operate efficiently and maintain compliance. This article has provided a comprehensive overview of these concepts, listed of goods and services, and benefits of understanding them. By applying this knowledge and seeking Filings.ae expert guidance, businesses can navigate the UAE VAT system effectively and ensure accurate tax treatment for their transactions. 

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