Definition
Value added tax (VAT) is a consumption tax charged at each stage of supply: businesses charge VAT on their sales, reclaim the VAT paid on their purchases and pay the difference to the tax authority.
What is VAT in practice?
Each business in a supply chain charges VAT on its sales, reclaims the VAT it paid on its purchases and pays over the difference, so the tax is borne by the final consumer. VAT-registered businesses must issue tax invoices, keep records and file periodic returns. Some supplies, such as many exports, are zero-rated, and some are exempt. Similar taxes elsewhere are called GST, as in India.
One period for a VAT-registered trader
Example- Output VAT on sales of AED 14,000 at 5%
- AED 700
- Input VAT on purchases of AED 10,000 at 5%
- AED 500
VAT payable
AED 200
Rates and rules are set by each country. The UAE and Saudi Arabia both introduced VAT at 5% on 1 January 2018, and Saudi Arabia raised its rate to 15% from 1 July 2020. The two sides of the return are explained under input and output VAT.