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Real estate gets 3-year VAT exemption

The real estate sector has been exempted for three years from Value Added Tax (VAT), which comes into force from January 1, 2018, UAE Government said recently. VAT has exempted ‘residential buildings for sale or lease during the first three years in which the building is completed’, the UAE Government said in a statement issued on Tuesday, May 23, 2017. The UAE Federal Tax Authority (FTA) announced a selective tax of 100 per cent on tobacco and energy drinks, and 50 per cent on carbonated beverages that will be applied in the fourth quarter of this year, but exempted real estate for the first three years of its implementation.

International transportation, commodities and exports, health and education services, gold imported for investment purposes are exempted from taxes. “Also exempted are residential buildings for sale or lease during the first three years in which the building is completed, some financial services and empty plots of land,” the statement said.

The VAT announcement was made by the Federal Tax Authority (FTA) during its first meeting chaired by Shaikh Hamdan Bin Rashid Al Maktoum, Deputy Ruler of Dubai and Minister of Finance. The rate for value added tax (VAT) was set at 5 per cent and will be implemented on January 1, 2018. Shaikh Hamdan said that the VAT rule was introduced by the authority to achieve economic diversification in preparation for the post-oil era.

“The tax procedures law is in the final phase, and will soon be issued and published. The VAT law is being debated by the technical legislative committee in preparation for submitting it to the Cabinet for approval, while the selective tax draft law will be soon discussed by the committee,” Shaikh Hamdan said.

 What is VAT?

VAT is an indirect form of consumption tax. In a country which has a VAT, it is imposed on most supplies of goods and services that are bought and sold.

VAT is one of the most common types of consumption tax found around the world. Over 150 countries have implemented VAT (or its equivalent, Goods and Services Tax), including all 29 European Union (EU) members, Canada, New Zealand, Australia, Singapore and Malaysia.

VAT is charged at each step of the ‘supply chain’. Ultimate consumers generally bear the VAT cost while Businesses collect and account for the tax, in a way acting as a tax collector on behalf of the government.

VAT is intended to help improve the economic base of the country.

“Therefore, we will include rules that require businesses to be clear about how much VAT you are paying for each transaction,” a Ministry of Finance spokesperson said.

Residents of Dubai, Abu Dhabi and Sharjah had earlier been brought under a rental fee scheme, ranging from 3-5 per cent – close to the lower limit of VAT – although the government authorities have refrained from using the word ‘tax’ and using the popular term ‘fee’ to lessen the impact of the revenue generation process.

Mahmood Shaikhani, Managing Director of Shaikhani Group, says: “The exemption will help the real estate market to grow and mature more. The three-year tax break will help the market and the players to adjust to the new tax environment. We welcome the move. However, once introduced, the taxation could start from a very low base to help everyone involved.”

In 2018, consumers in UAE are expected to pay a 5 per cent value-added tax when purchasing most goods and services.

The six states in the Gulf Cooperation Council (GCC) region have agreed to implement VAT, which will generate $25 billion (Dh91.8 billion) in tax proceeds every year.

Noorul Asif, Chief Operating Officer of Schon Properties, said, “This is a very welcome move and gives all of us adequate time to adjust to the new realities and also will help developers to adjust prices accordingly. A development usually takes 2-3 years from start to completion. I’m sure developers of new projects will adjust their prices accordingly – for future projects.”

The VAT will push up the cost of living slightly for a lot of people, but this will all depend on the individual’s buying preferences and lifestyle.

Tourists are a significant source of revenue for the UAE and will pay VAT at the point of sale.

Sailesh Jatania, Chief Executive Officer of Gemini Property Developers, says, “The move reflects the government’s pro-business vision and will give us enough time to prepare for the new system. It usually takes 2-3 years for a project to complete from the planning stage. So, the three-year tax break will help developers of new projects to adjust pricing accordingly. The exemption of the real estate from VAT will help the sector to grow and mature more. We welcome the move. However, once introduced, the taxation could start from a very low base to help everyone involved.”

GCC states had already agreed to exempt about 94 food products, as well as the healthcare and education sectors.

Experts say that while this will make the real estate sector unattractive in the short term, those looking for long term investment will find it attractive. “The advantages of VAT are obvious. The UAE, unlike any other country, is highly transparent and corruption-free. So all taxes collected will benefit the economy. It will strengthen its infrastructure. The greatest disadvantage is that of inflation, which in turn will make the real estate sector unattractive for investors in the short term, especially for speculators. Those looking at it long-term will realise its huge benefits and adapt,” Mohanad Alwadiya, Managing Director of Harbor Real Estate, told Gulf Property.

Businesses are encouraged to implement the new tax system, but the Ministry of Finance said that the government is currently in the process of defining the exact fees and penalties for non-compliance.

If the initial date for the VAT roll-out is followed, businesses can probably start registering for VAT from 1st October 2017. As announced recently, the registration will be open three months before the go-live date. Companies will have the option to register online. For most businesses, VAT returns should be filed every three months. Filing of returns can also be done online using the government’s eServices.

“As per global best practice, the UAE is exploring other tax options as well. However, these are still being analysed and it is unlikely that they will be introduced in the near future. The UAE is not currently considering personal income taxes, however,” the Ministry of Finance spokesperson said in a statement recently.