UAE's VAT law a good model for India's GST

The Goods and Services Tax (GST) will soon have been in force for a year in India, but it is still seeing the introduction of new compliance requirements, deferment of provisions, statutory deadlines and frequent changes in rates. The United Arab Emirates (UAE) introduced Value Added Tax (VAT) with effect from January 1, 2018 and it is more straightforward and business-friendly, and has simpler provisions and fewer compliance requirements than India’s GST. 

It could be argued that considering the vast differences in size, economic maturity and diversity of the two countries, it is unfair to compare their tax regimes. Nonetheless, as this article argues, UAE’s VAT law has a few progressive provisions that India may consider adopting to benefit businesses.

Concept of tax group

UAE’s VAT law provides for a facility whereby group companies under a single management can opt to operate as a tax group. A single registration can be obtained by the tax group instead of separate VAT registrations for each group member. This facility enables group companies to transact with each other without worrying about the tax implications of inter-group transactions, and hence helps the group management to minimise compliances and optimise cash flows. 

Keeping in mind the history of centralised registration for service providers, which was prevalent under the erstwhile service tax regime, the concept of grouping could be a welcome move for big business groups in India as well. 

Simplified reverse charge mechanism 

Like India’s GST, UAE VAT law also provides for a reverse charge mechanism (RCM), though in a simplified avatar. 

RCM in UAE is applicable where purchases are made from outside UAE and do not cover any domestic purchases (except for specific products). Further, unlike Indian GST, RCM under UAE’s VAT law is based on the principle of “non-cash” and thus, it does not require the importer to deposit taxes in cash with the government upon importation of goods. Importers are required to show the tax on importation as input VAT against corresponding output VAT in the VAT return. It is merely an accounting entry and no tax outflow occurs at the time of importation. The tax is actually paid on such imported goods once it is sold in UAE. 

The simplified RCM makes more sense, as it does away with the burden of first paying the tax and then claiming the credit for tax paid. 

Single tax slab 

UAE VAT has introduced a single tax rate slab of five per cent (excluding zero rated supplies and exempted supplies), compared to four tax slabs (five, 12, 18 and 28 per cent) in India. Such a single tax rate leads to simpler compliance requirements for tax payers and saves them from classification disputes that India continues to struggle with. 

In India, a single GST rate structure may not be desirable at this nascent stage, as the government needs to maintain tax neutrality and also sustain tax revenue earned under the pre-GST era. 

However, moving towards a single tax rate in a gradual manner would be the right thing to do. The government’s recent move to bring a majority of the items under the five per cent and 12 per cent tax brackets indicates that if not a single rate, Indian GST can also expect to have a reduced number of tax slabs in future.

Simpler compliance requirements

UAE provides a simpler, more business-friendly tax environment from the compliance perspective. India’s GST law requires the issue of several documents, whereas a taxpayer in UAE is required to issue only three types of documents — tax invoice, summary invoice and credit note, as per the applicable business scenario.

In addition, unlike Indian GST, UAE’s VAT law has fixed a threshold limit (187,500 Emirati dirhams) even for obtaining voluntary registration (except for non-resident assessees). This restriction on voluntary registration reduces the tax authorities' work burden and, as a result, the taxpayer may expect to get a better level of service.

Similarly, UAE’s VAT prescribes a simple one-page return with no requirement for matching of invoices or credits, which is less time-consuming requirement compared to India, where dealers are currently filing two returns (GSTR 3B and GSTR 1).

Business-friendly provisions

Transition from a tax-free regime to VAT is bound to bring anxiety to businessmen in UAE, but several provisions under UAE VAT are business-friendly from an operational standpoint. For example, the law allows tax adjustment of bad debts from output VAT payable in relation to consideration not recovered for the goods or services, subject to fulfilment of certain conditions. 

Further, Indian GST allows refund of accumulated credit only in specific cases such as exports and inverted duty structure, whereas UAE’s VAT allows refund of accumulated credit in all cases if the tax payer is unable to utilise the credit. This would result in better working capital management for businesses. 

To sum up, many provisions in UAE’s VAT law can be borrowed and used in India with slight modifications.    

The writer is Partner - Indirect Tax, KPMG in India