Analyzing VAT Implementation and Accounting Issues in the UAE

This report provides a comprehensive overview of the implementation of Value Added Tax (VAT) in the United Arab Emirates (UAE), addressing the accounting issues that companies and firms are likely to face. It details the methodology adopted, which mirrors VAT systems in other countries, focusing on the definition of supplies, accounting treatment, tax application, return filing frequency, and payment procedures. The report outlines the role of the Federal Tax Authority (FTA), the threshold limits for VAT registration (AED 375,000), and the deadlines for businesses to register under VAT laws. It further explains the concepts of taxable, zero-rated, and exempt supplies, as well as Input Tax Credit and Output Tax, illustrating these with examples. The report aims to guide businesses in successfully implementing VAT, managing compliance, and mitigating risks, offering insights into VAT registration, accounting entries, and overall VAT management.

ABSTRACT
Earlier the implementation of the VAT in UAE was the plan but now has become the reality in
UAE. Most of the countries have the system of VAT or GST in accordance with the law of that
particular country. In the initial stages these countries have also faced the challenges and have
been solved easily. This article for the publication has been given for providing the overview of
VAT and accounting issues that company and the firms will face in UAE. Along with defining
the issues, the solution thereon has also been explained. It will help the businesses to implement
the VAT successfully and manage the VAT related issues even after the implementation. There
will be plethora of issues that the businesses will face in VAT registration. Detail has been given
as to which approach of accounting shall be used for making the accounting entries under VAT.
With these considerations the article is being presented and hopes it will be useful for the readers
and users.
KEY WORDS
Following key words have been used in the article.
UAE – United Arab Emirates
VAT – Value Added Tax
GST – Goods and Service Tax
GCC – Gulf Cooperation Council
SMEs – Small and Medium Sized Enterprises
FTA – Federal Tax Authority
ERP – Enterprise Resource Planning
JAFZ – Jebel Ali Free Zone
DAFZ – Dubai Airport Free Zone

INTRODUCTION
The government of every country lays down every year new policies and procedures so as to
equip the public with the new technologies and advancements in every respect. It may be either
related to the new schemes such as for setting up the cold chain project the government provides
the subsidy, similarly the government provides aid for the setting up of the hospital or the
college. In the similar manner, it is duty of the government to bring about the changes in the tax
regime of the country. It is because the financial structure of the economy needs update with the
increase or decrease in the standard of living of the economy. This financial structure is relating
to the income of the residents and which in turn are required to be updated with the changes in
the tax regime.
In this article the VAT implementation in UAE, one of the member country of GCC has been
discussed in detail. The article has provided the overview of the how the system of VAT will
work, how the tax will be charged and how it will be Calculated, how the returns are required to
be filed and most importantly how the accounting will be made in the accounting software of the
company, etc. The implementation of the system of VAT in the GCC will impact all the
businesses of the country and on all parts of the business. Every kind of implementation requires
the significant time so as to make their people, suppliers, employees and etc prepared for the
change. The support of the top management of the company will always be required for its
successful implementation.
The implementation of the VAT shall be well designed and planned for the purpose of having the
system of ongoing compliance and low risks.
We will be happy to hear about the article and the topic at any point of time. For any type of
Queries, you may write to us or email us. With these considerations, the article has been written
and presented in appropriate and sufficient headings.

DESIGN METHODOLOGY / APPROACH
The methodology that the country has adopted is similar to the VAT prevailing in other
countries. The following are the reasons for the similarities:
- Definition of the Supplies is similar and there is no use of the words sale and purchase
separately as done under the old VAT regime.
- The accounting treatment along with the consideration of each and every item of the
purchase and sale is similar
- The name given to the tax on purchase and tax on sale is similar.
- The frequency of filing of the returns is same. It may be monthly and quarterly.
- The frequency of making the payments of tax is similar.
Methodology or approach is concerned with defining how the task has been done. It is very
necessary to have the detailed methodology and approach so as to have an understanding of both
the positive and negative side of the approaches and which further help the company to adopt
such approaches in the system of the businesses.
At first the reason for implementing the VAT in UAE has been identified. The major reason
which has come into place is that the financial statements of the enterprises cannot be compared
with other companies of same industries operating across the globe. Second reason is to provide
the each and every sector the lawful way of operation and eradicating the events of the double
taxation.
First methodology is to make the people understand the meaning of VAT and how it will work in
the economy of the UAE, before whom the businesses and the SME’s thereon will get registered
under VAT, what are the requirements for getting the registration under VAT, what type of
documents are required to be attached file obtaining the registration under the new regime of
VAT, what are the deadlines if any mentioned for obtaining the registration under VAT regime
for the different classes of businesses, what will be the periodicity of depositing the tax before
FTA, what will be the periodicity of the filing of the Returns under VAT regime, what will be

the threshold limit if any for getting the registration under the VAT and so on. Therefore, these
details shall be understood first (Ahmad & Brosio, 2010)..
At first the meaning of VAT shall be discussed. Vat is the tax which is indirectly paid to the
credit of the Government after receiving from the customer. VAT will not only apply of the
domestic dealing but also shall apply in case there is the exportation of goods. It is defined as the
Value addition tax which means that the tax shall be charged at every point of time where there
has been creation in terms of the value has been done. In other words, if the value is added to the
goods either in monetary terms or in terms of the quality, the tax will be charged on the total
value of the product (Ainsworth & Alwohaibi,2016). It will be explained in detail with the help
of the very small example. For instance, Mr A, being the supplier send the goods to factory at
AED 1000 plus the VAT of AED 50. This AED 50 will be received by the supplier from the
factory and will be paid by the supplier to the credit of the government and factory will receive
the benefit in terms of the credit available due to filing of account. Then the factory
manufactures the product with the help of labor and machines. This manufacturing has added the
value to the product and accordingly the factory now sells the product to wholesaler at AED
2000 plus the VAT of AED 100. Now the factory will deposit the tax of AED 50 in net to the
government authorities because of the fact that the tax amount already paid to the supplier will
be available as the credit to the factory and will be subtracted from the tax received from the
wholesaler. Continuing with the same example if now the wholesaler makes some addition for
instance added the brand as per the requirement of the retailer, than the wholesaler will add the
value and then charge the VAT amount. Now the wholesaler charges AED 3000 plus VAT of
AED 150 and sell the goods to retailer. Now the wholesaler will deposit the amount of AED 50
with the government as the difference between the charged amount and the tax paid on the
purchases. The retailer then will make the additions either by repacking the same or by changing
the packing and so on and sells the goods to the end consumer. The retailer charged $5000 plus
AED $250. The retailers will have the credit of the earlier credit amounting to AED 50 and thus,
the retailer is required to make payment of the AED 100 and at this point of time the value added
chain gets break. In this example Vat shall be applicable for 5% accordingly the figures have
been arrived. . Thus, the VAT regime consists of the fact that the value is required to be added at
every stage of production till it reaches the end consumer and with that creation of the value to
the products, the credit of the inputs or inputs services are used and the payment is made in net of

the tax charged. It has been mentioned that VAT will be applicable on every type of goods and
services and there are exceptions to this also (Kneller, Richard and Florian, 2016). The
exceptions includes items of food, medicines, zero rated supplies whereby there is either
exportation of goods or services provided internationally, healthcare products and services,
education and sale or lease of the property.
The tax credit that the factory, wholesaler and the retailer has received is known by the name of
the Input Tax Credit and the tax that is being charged from the next party and thus receives is
known by the name of the Output Tax.
VAT to be paid equals to the Output VAT charged from the next party less the Input VAT credit.
The design starts from the definition of the authority that has the power to control and manage
the affairs of the VAT implementation, function and management thereon. The authority is
known by the name of FTA which means Federal Taxation Authority. It has laid down the
threshold limits for the registration under VAT laws and the procedures for filing the VAT
returns and the payment of Tax. For the purpose of the registration under the VAT laws,
following have been enacted and it is mentioned as:
- At first the FTA has divided the supplies into three sections. One is taxable supplies,
second one is Zero Rate Supplies and the third one is Exempt supplies/. First supplies
include the supplies of goods and services for the consideration and on which the tax is
levied. Second is the supplies on which the government’s tax will never be due and third
supplies includes those goods or services for which the rate of zero has been undertaken.
- The threshold limit for the turnover has been the AED 375000. It is mentioned that any
businesses with expected or actual turnover of more than AED 375000 shall be liable to
get it registered under the VAT laws. The non compliant of this provision will lead to the
penalty of AED 20000 (Whitehouse & Nurmi,2016).
- Along with defining the threshold limit the law has also provided the deadline as to by
how much time the businesses are required to get themselves register under the VAT
laws. First deadline mentions that UAE tax residents with the turnover of greater than
AED 150 million shall apply for the registration under Vat by 31st of October 2017, UAE
tax residents with the turnover of greater than AED 10 million shall apply for the

registration under Vat by 30th of November 2017 and UAE tax residents which will reach
the position under the mandatory registration, then the businesses shall apply for the
registration on or before 4th of December 2017. These deadlines have been included in the
system only to ensure that all the businesses of the UAE have been registered in time.
- The registration portal is available on the portal of the FTA website. It requires some list
of documents including the Tax Payer Identification number and address proof of the
business, etc.
- Vat has been proposed and will be made applicable from the1st of January 2018 and all
the accounting treatment thereon will change accordingly. The accounting treatment has
been the major issue of concern dealing with the GST scenario. It is because with the
implementation of the VAT the act of treatment of purchases and sales will differ with
respect to the accounting and the presentation thereon. It means when we account for the
purchases, the amount in front of purchases shall be equal to the gross value of purchases
excluding the VAT amount and in sales also the VAT amount is excluded. It means the
Vat amount both of the sale and purchase will be transferred under the head of the duties
and taxes wherein there will be the proper division of the VAT amount on purchase as
well as the VAT amount on sales. The VAT amount on purchase is termed as the Input
VAT Credit and the VAT amount on sales is termed as the Output VAT payable.
For instance, If ABC purchases the goods worth of AED 10000 from XYZ. 5% VAT is
applicable on it. The purchase accounting entry will be:
Purchase Account Dr10000
Input VAT Dr 500
To XYZ 10500
Similarly for sales accounting will be done. If ABC sells the goods to MNO for $20000,
5% VAT is applicable on it. The sale accounting entry will be:
MNO Dr20000
To Output VAT 1000
To ABC 19000
- At the end of every month there will be either the balance in the input credit account or
the output payable account. If there is the balance in the input credit account, then it is

meant that there will be no liability of paying the tax rather there will be tax with the
Government for your account. If there is the balance in the Output credit account, then
the amount of VAT will be regarded as the amount payable and is required to be paid
before filing of the return. It is because the return cannot be filed without the payment of
the tax (Thacker, 2012).
- Second major issue is in the accounting treatment of the VAT in case of the
manufacturing operations. It is because under the manufacturing operation there will be
difficult to relate the input VAT with the each value addition made within the factory of
the business. It is because there might be the case where the goods are sent from one
department to another and then cost is found out.
- VAT system works on the self assessment procedure wherein the tax payer is liable to
calculate the tax liability on his own with the proper calculation of the sale and purchase
and checking them with the books of accounts of the company.
- Along with the self assessment procedure the Act has also laid down the types of records
that every registered person shall prepare. First is sale invoice with correct serial number.
Similar for debit and credit notes. Third is the record of import and export made and last
are the accounting books which will include the sale ledger, purchase ledger, input and
output vat ledger (Mears, 2016).
- The approach that the FTA has adopted is in accordance with the work done by the other
countries. In accordance with the size of the economy the methods and approach adopted
by the FTA is adequate. The FTA portal has been working well and not received any
complaints regarding the registration under VAT rather the businesses have find it very
user friendly.
- At the time of the implementation of the VAT, the businesses are required to implement
the system whereby the current processes can be modified and altered so as to adopt the
new Information Technology system on which the entries in accounting can be made.
The system shall be well equipped with the updated software like Tally ERP 9. It is
because with the updated software and upgraded technologies there will be the less
chances of having riskiness in accounting. It is very necessary to have the clear and
precise accounting. It is because of the reason that it is the accounting work only through

which the base of VAT return will be developed. If the data is not correct then it shall
serve nil purpose as the VAT return will not be filed (Poddar & Kalita, 2010).
In this manner, the design and the approach has been considered in this article.
FINDINGS
After understanding the design and the approaches that have been adopted for the purpose of
implementing the VAT in UAE, there is the need of understanding the findings through the VAT
laws and discussion that is being implemented. Following are the findings from the study:
Need of Updated Software – Currently businesses in UAE does not have any kind of tax
due to which the companies and the firms have adopted the general accounting and other
software which can be used in either conditions whether the company is manufacturing or
trading or service provider (Karen, 2010). But with the implementation of VAT in UAE, it is
very important to have such an information technology system which can cope up with the
changes in the external environment including the changes in VAT laws and rules there under.
VAT has the implication on the overall functions of the business, whether it is purchase, whether
it is sale or etc. major finding in this area is to either employ the new system like Tally ERP 9 or
else shall modify their current systems and the processes so as to make all the required reports
available at any point of time. In case the current system is being modified or altered then it is
must be ensured that the processes and transactions are not being hampered on testing rather it
shall be kept as safe (Haines, 2016). It must be checked that VAT shall be mapped according to
the nature of processes and business functions of the organization. It must also be checked that
whenever any authority comes either for the inspection or for the audit, the document relating to
VAT shall be immediately given and other reports as required by such authorities (Zafarullah,
2018).
Ongoing Compliance and Review – The second major finding out of the design and the
approaches of the VAT implementation is that the VAT system is required to be checked for
compliance on the daily basis or the regular basis. It is because sometimes due to non review on
the timely basis there comes an error and the report thereon of the VAT calculation and the sale

and purchase reconciliation comes wrong or the change in rate of the particular item does not
reflects in the system. Thus, there is the close need of having the continuous review so as to
ensure that the company is in compliant with the requirements of the VAT laws and regulations
and that too on the timely basis (Azzam & Rettab, 2015).
Use of External Advisors – With the implementation of the VAT and due to the presence of
various issues under the VAT accounting and returns compliances and majorly due to
complexity in operating the FTA portal, most of the businesses will look for the advisors who
will be external to the company. These advisors will guide the company as well as the concerned
official as to how the VAT issues shall be resolved and accounting shall be done. Due to this the
compliance part will be outsourced.
RESEARCH LIMITATIONS / IMPLICATIONS
With the understanding of the design and methodology issues and checking the findings of the
company, there shall be discussed which will be relevant for this article is the limitation that has
been faced while conducting the research and the implication that the research will have on the
VAT accounting issues.
JAFZ / DAFZ – As per Article number 51 (1) of the UAE cabinet resolution number 52 issued
in the year of 2017, some zones are there which will be regarded as free zones and on that the
VAT regime will not be made applicable. These free zones are the zones which remain outside
the territory of the UAE in order to ensure the presence of the effective broader control (Stanley-
Smith, 2015). These free zones are exempted from the application of the regime of VAT. The
main limitation that has been observed is that the government has been failed to specify as to
which free zones or the designated zones will be exempt and satisfy the conditions as laid down
under the article 51(1). No clear distinction has been made as regard to which are the free zones
and which is not the free zone. As per the UAE law, JAFZ and DAFZ have been regarded as the
free zones and are exempt from the VAT. The decisive factor for determining the free zones is
the operation of the activities beyond the fences (Ahmad, 2010). The free zones are the fenced
free zones. The limitation is that the free zones have been classified on the basis of their location
from the fences.

Contracts – The second and major limitation is the entering into contract with other parties
before the implementation of the VAT. It is said that if the contract is entered into with the other
business party and that too before the implementation of the VAT then there is the double
opinion that either the price so decided and discussed will be inclusive of VAT or exclusive of
VAT (Sharma, 2017). Therefore, before entering into the contract before the implementation of
VAT, there should be clear and concise disclosure in the contract about the VAT rate and price.
The law of UAE states that if the contracts that have been entered earlier before the
implementation of the VAT, then it shall be treated as the mount of contract which is VAT
exclusive (Almutairi, 2014). This condition will prevail if:
o If the customer involved in the contract is the registered business
o If the customer so concerned can take the benefit of the VAT charged as input
VAT and
o If the supplier takes the confirmation from the customer regarding the
aforementioned two points.
The price shall be VAT inclusive if and only if:
o The goods and services under question are exempt from VAT or subject to the
VAT.
o The customers involved in the contract are not registered person under VAT
Regime.
No data Available – The major limitation is that the government portal of UAE which is FTA
does not provide the data relating to the customers who are registered in VAT due to which the
entry to the contract and determining the price thereon will always be in the confusion stage. The
contract price will not be determined as whether it is inclusive of VAT or exclusive of VAT
(Gurrib, 2017).

ORIGINALITY / VALUE
After analyzing the limitations that has been faced during the research and implication thereon, it
is to be analysed whether the VAT regime as implemented in UAE is original or not. The work
of the VAT regime in UAE is not original but it has been copied from other countries.
LIST OF REFERENCES
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sectors. Fiscal Reforms in the Middle East: VAT in the Gulf Cooperation Council, 229.
Ainsworth, R. T., & Alwohaibi, M. (2016). GCC VAT: The Intra-Gulf Trade Problem, 21(2),
42-53
Ahmad, E. (2010). 11. Institutions, political economy, and timing of a VAT: options for Dubai
and the UAE. Fiscal Reforms in the Middle East: VAT in the Gulf Cooperation Council,
283.
Almutairi,. (2014). "Competitive Advantage through Taxation in GCC Countries".
International Business & Economics Research Journal (IBER) 13 (4): 769.
Azzam, A., & Rettab, B. (2015). Optimal commodity taxation and consumer welfare: an
empirical application to the UAE. International Journal of Economic Policy in Emerging
Economies, 8(3), 191-212.
Gurrib, I. (2017). An assessment of the potential VAT revenue collection for the United Arab
Emirates. Macroeconomics and Finance in Emerging Market Economies, 10(3), 306-321.
Haines, A. (2016). Businesses rush to prepare for UAE VAT. International Tax Review, 5(1),
122-131
Karen R, (2010). "Jury Is Still Out On VAT's Viability in U.A.E'". Emirates Business 24/7,
101(5), 191-197.