Since the implementation of Value Added Tax (VAT) in the UAE on January 1, 2018, understanding the applicable VAT rates has become essential for businesses. The Federal Decree-Law No. (8) of 2017, along with the Executive Regulations, outlines three VAT categories: Standard Rated (5%), Zero-Rated (0%), and Exempt supplies. Each has different implications for VAT collection, reporting, and input tax recovery.
This blog will help you understand the difference between these categories and how your business can stay compliant.
Need help classifying your supplies or filing accurate VAT returns? PEAK Business Consultancy Services offers expert VAT and corporate tax consultancy services in the UAE. We make tax compliance easier for businesses of all sizes.
1. Standard Rated Supplies (5%)
Standard rated supplies are goods and services subject to the 5% VAT rate. Businesses supplying standard-rated goods must charge VAT to customers and remit the collected amount to the Federal Tax Authority (FTA).
Examples of Standard Rated Supplies:
- Electronics and consumer goods
- Food and beverages (excluding essential items)
- Hotel and hospitality services
- Retail and wholesale transactions
- Professional services like consulting and accounting
For standard-rated transactions, businesses can also claim input VAT on associated expenses, which reduces their net tax liability.
PEAK Business Consultancy Services can help you manage your input-output VAT calculations and ensure timely and accurate VAT return filings. Click here to consult our VAT specialists.
2. Zero-Rated Supplies (0%)
Zero-rated supplies are taxable supplies charged at a 0% rate. Though the business does not collect VAT on these supplies, they are still entitled to claim input tax on purchases related to such supplies.
Examples of Zero-Rated Supplies:
- Exports of goods and services to outside the GCC
- International transportation of passengers and goods
- First supply of residential buildings (within three years of completion)
- Certain educational and healthcare services
- Investment-grade precious metals (gold, silver, platinum)
Documentation is critical for applying zero-rating correctly. Proof of export, invoices, and customer location validation may be required by the FTA in case of audit.
Unsure whether your service qualifies as zero-rated? Let PEAK Business Consultancy Services guide you with a compliance review and VAT classification support.
3. VAT-Exempt Supplies
VAT-exempt supplies are not subject to VAT at all. No VAT is charged on these supplies, and the supplier cannot claim input tax on associated costs. This can lead to increased operational costs due to non-recoverable input VAT.
Examples of VAT-Exempt Supplies:
- Certain financial services (interest, loans, bank accounts)
- Residential property rentals (after first supply)
- Local passenger transport (taxis, public buses)
Suppliers dealing in exempt supplies should assess the financial impact of unrecoverable VAT and explore partial exemption calculations if they also provide taxable supplies.
Concerned about input tax losses from exempt activities? Contact PEAK Business Consultancy Services for a VAT cost optimization strategy tailored to your business model.
Comparison Table: VAT Rates in the UAE
| Category | VAT Rate | Input VAT Recovery | Typical Examples |
|---|---|---|---|
| Standard Rated | 5% | Allowed | Retail, hospitality, professional services |
| Zero-Rated | 0% | Allowed | Exports, international transport, certain health/education |
| Exempt | 0% | Not allowed | Banking services, residential rent, local transport |
Why Proper Classification Is Important
Incorrect classification can result in:
- Loss of input tax credits
- Incorrect VAT returns
- FTA penalties or fines
- Increased scrutiny during audits
Accurate classification is essential not just for compliance, but also for cash flow management and pricing strategies.
How PEAK Business Consultancy Services Can Help
Whether you’re a startup or an established enterprise, proper VAT rate determination is crucial for your business’s financial and legal health. PEAK Business Consultancy Services provides end-to-end VAT solutions including:
- VAT registration and rate classification
- Monthly/quarterly VAT return filing
- FTA audit support and penalty mitigation
- Sector-specific VAT compliance (real estate, healthcare, tech, etc.)
Visit our website or schedule a free consultation today to ensure your VAT compliance is accurate, complete, and cost-efficient.
Conclusion
Understanding the difference between standard-rated, zero-rated, and exempt supplies is critical for proper VAT compliance in the UAE. Each category has distinct financial and regulatory implications, particularly regarding VAT collection, input tax recovery, and audit readiness.
Partner with the experts at PEAK Business Consultancy Services to ensure your business navigates the UAE VAT landscape with confidence and compliance.
