The United Arab Emirates implemented Value Added Tax within the country in 2018. The application of this new tax framework had a significant impact on many sectors, including transportation. With the evolving business landscape, understanding VAT on transportation services in UAE has become essential for businesses operating in this particular sector. For instance, how VAT applies to different kinds of transportation services in the country.
In this blog, we have itemized the essentials of transportation VAT in UAE to help you keep your finances on track and enjoy your journey smoothly and progressively.
Understanding VAT in the UAE
VAT is a consumption tax imposed on goods and services at each stage of production and distribution, which is eventually borne by the end consumer. The new tax system was introduced by the government as a new source of revenue and diversification from oil and gas dependence.
The UAE implemented VAT at a standard rate of 5%, applied to most goods and services, while some are exempted and zero-rated. According to the UAE VAT law, all businesses whose taxable supplies and imports exceed AED 375,000 in the last 12 months are required to register for VAT with the FTA (Federal Tax Authority), while businesses exceeding AED 187,500 can opt for voluntary registration.
VAT application on different goods and services
The VAT in the UAE is categorized into three groups:-
Standard rate (5%) – Applies to most supplies and services, including electronics, clothing, restaurants, transportation, etc.
Zero-rate (0%) – Applies to specific services and commodities, such as exports outside the GCC, international transportation, certain medical and educational services, and the supply of residential property.
Exempt – Certain goods and services, such as local public transport, basic foodstuffs, and financial services are completely exempt from VAT.
Federal Tax Authority (FTA) in the UAE
The Federal Tax Authority is responsible for overseeing, collecting, and enforcing federal taxes in the UAE, such as VAT, Corporate tax, excise tax, etc. It administers UAE’s VAT system, publishes regulations and guidance on VAT compliance, and implements it through audits and penalties.
Transportation services in the UAE
Transportation services are categorized into various types in the UAE:
- Local Transportation of goods.
- International transportation services of goods and passengers.
- Cargo Transportation services
- Inbound Transportation
- Outbound Transportation
- Cross Border Transportation
- Courier Services
- International Courier Services
- Domestic Courier Services
- Cash on Delivery Services
- Transportation services related to passengers
To understand VAT implications on the above transportation services in detail, consult a tax advisor at Shuraa Tax.
VAT on transportation services in UAE
Transportation refers to the mode of transport used to navigate goods or passengers to the determined place at the scheduled time as per the requirement. For example, buses, trains, aircraft, ships, etc. The VAT system applies to various sectors in the UAE, including transportation. However, specific rates and exemptions are levied on different types of transportation services. Hence, it is crucial to understand the levels to avoid any compliance issues.
A standard rate of 5% is applied to many transportation services. However, there are some exemptions:-
VAT on domestic passenger transportation
Transportation of passengers by land, water, or air within the UAE is exempt from VAT, such as taxis, buses, trains, trams, ferries, and similar modes of transport.
VAT on international transportation
- Transportation of international passengers and goods including intra-GCC (Gulf Cooperation Council) travel is classified as zero-rated. However, businesses involved are still required to comply with VAT reporting requirements.
- Supply of different means of transport for carrying goods and passengers will also be counted as zero-rated. For example, leasing of airplanes, ships, and trucks for commercial use.
- Goods and services related to these means of transport are also zero-rated. For example, maintenance and repair services for international transportation vehicles, food services for passengers in transit, ground supervision services for airplanes, etc.
VAT on local passenger transport used for leisure activities
Transport services used for leisure purposes including tourist cruises or private jet charters are subject to the standard 5% rate.
VAT on International passenger transport services by aircraft
International passenger transportation services by air are zero-rated. It includes flights originating or terminating outside the UAE, even if they have a layover within the country.
VAT on import of vehicles
Vehicles imported into the UAE would be subject to 5% VAT.
VAT on transportation services in UAE Free Zones
Certain free zones follow special VAT regulations. Therefore, it is crucial to check the VAT-related rules and regulations in the relevant free zones.
VAT on local transportation of goods in UAE
The VAT on local transportation of goods in the UAE is set at a standard rate of 5%.
Zero-rated vs Exempt: VAT on transportation services in UAE
The key difference between zero-rated VAT and exempt VAT lies in businesses’ right to claim input tax refunds.
Zero-rated
No taxes are charged on these goods, however, the businesses are required to:
- issue proper tax invoices mentioning the 0% VAT rate
- maintain records of zero-rated supplies
- file VAT returns with the FTA
Businesses providing zero-rated supplies have the right to claim back the VAT paid on expenses incurred for the production of these supplies, thus reducing their overall tax burden.
VAT exempt
No VAT is charged on these supplies. This means they are not within the sphere of VAT application. In addition, businesses have no right to claim VAT paid on expenses related to exempt supplies, leading to high input costs.
VAT implications on transportation services for businesses and individuals
The implications of VAT on transportation services in UAE are different for businesses and individuals. However, it depends on the specific type of service. Below listed are some key implications:
- Domestic transportation of passengers including taxis, buses, and trains is VAT exempt. This regulation simplifies the compliance procedure for businesses operating in this particular sector.
- Flights, airfares, etc., are zero-rated, leading to lower costs for businesses.
- International travel to the UAE is also zero-rated, benefiting airlines, hotels, and tourist attractions.
- Businesses supplying zero-rated services can claim VAT paid on related expenses. This helps in improving their cash flow.
- Businesses conducting zero-rated transactions in the UAE still need to issue proper tax invoices, ensure record-keeping, and file VAT returns.
- Businesses can choose to offset the VAT price, pass it on to customers, or adjust the prices based on specific services.
- Individuals traveling for business purposes can claim input tax refunds on travel expenses.
Make tax matters simple with Shuraa Tax
Due to the introduction of VAT in the UAE, a new layer of complexity is added to the business sectors, including transportation services. This influences individuals as well as businesses to stay informed about VAT on transportation services in UAE, making it a strategic obligation.
To withstand the ever-changing tax landscape in the UAE, seeking professional guidance becomes vital to simplify the taxation and financial management needs of entities. Shuraa Tax has a team of knowledgeable and qualified accountants, auditors, and tax advisors who help businesses stay current with the UAE’s tax system, manage financial responsibilities, and ensure compliance with the guidelines of the authorities.
If you wish to simplify taxation or need assistance with any tax issues, contact Shuraa Tax at [email protected]. Discover their comprehensive range of services and get more information on VAT and other federal taxes in the UAE at www.shuraatax.com