Value Added Tax (VAT) Explained

Value Added Tax or VAT is an indirect tax, which is imposed on goods and services at each stage of production, starting from raw materials to final product.

UAE is developing a broad framework for the introduction of VAT. As confirmed VAT will be implemented in the UAE from January 1 2018. So I feel its time you deepen your knowledge on VAT and also understand what VAT is and take action now to prepare for it.

 

Features of Value Added Tax Explained:

  1. VAT is a form ofindirect taxation: This means that VAT is paid to the government by one entity in the supply chain, but it is passed on to the consumer as part of the price of a good or service. The consumer is ultimately paying the VAT by paying more for the product.
  2. It is a form of consumption tax: VAT is expected to be passed on to the consumers in the price of goods and services they consume. This means that VAT is collected when goods or services are actually purchased by the consumer.
  3. Easy calculation: VAT is easy to calculate as the tax amount is charged as a percentage of the final value of goods or services.
  4. VAT avoids cascading effect of tax: VAT ensures that same commodity is not taxed again and again and there is no cascading effect. In other words, value added means difference between selling price and purchase price. So VAT avoids cascading effect of a tax.
  5. VAT system is not same in all places. VAT is determined by states, cities and local municipal authorities and as such varies geographically.
  6. VAT is collected completely from the end purchaser and the seller does not pay any part of it.

I believe the decision to introduce VAT is a part of the government’s efforts to secure new sources of income that will help in diversifying UAE’s economy. For countries seeking to reform their tax system and at the same time find ways of raising more revenue VAT proves to be an attractive instrument.

 

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