Rajesh Khanna (Chartered Accountant) 26 January 2018
My query is on the treatment of retention payments for calculation of VAT under the laws of UAE. The facts of the case are as follows:
1. Client and Contractor enter into a construction contract for AED 1,000,000/-
2. Break-down of the contract value
Activity 1 : 200,000
Activity 2 : 500,000
Activity 3 : 300,000
3. Payment terms: Advance 10% (recoverable from progress bills) and Progress works 80% net and 10% retention (to be deducted against each progress bills). i.e. at every stage of progress invoicing client will deduct 10% retention. The retention amount is payable upon completion of the project and obtaining Taking Over Certificate.
4. The client carries out invoicing as follows:
a) Advance invoicing: AED 100,000
b) 1st Progress invoicing: Gross AED 200,000 less 10% advance (i.e. 20,000) and 10% retention (i.e. 20,000). Therefore net payment to be received is AED
c) 2nd Progress invoicing: Gross AED 500,000 less 10% advance (i.e. 50,000) and 10% retention (i.e. 50,000). Therefore net payment to be received is AED
d) 3rd progress invoicing: Gross AED 300,000 less 10% advance (i.e. 30,000) and 10% retention (i.e. 30,000). Therefore net payment to be received is AED
e) Retention invoicing: AED 100,000 upon completion of the project
5. VAT treatment ???
a) Advance invoicing: 5% VAT applicable on advance invoicing. i.e. AED 5,000
b) Progress invoicing: Is VAT applicable on Gross amount less advance or on net amount ???
c) Retention invoicing: Is VAT applicable on Retention invoicing done at completion.
Request your response on the above at the earliest.
Zahid (Finance Manager) 08 April 2018
VAT in UAE works same as GST in India i.e VAT is applicable on the goods and services as well in UAE. The concept of supply of goods & services are very clearly mentioned but what not mentioned is the VAT applicability on Retention money deduction adjustment on progressive invoice. As per my knowledge VAT would be applicable on Gross Certified amount without deduction of retention money. As the services has been rendered and retention money adjustment is just a clause to keep a some of money from Gross Amount any deduction other than discounts shall be calculated as assesable value for VAT calaculation. However for service organisation VAT is applicable on services rendered/ accrued or Money received whichever is earlier. For Advance money received before VAT implementation shall also be included for the invoices raised after VAT applicablility. It is to be noted advance money received after vat implementation will attract VAT on the advance money and the same shall be excluded from assessable value on progressive invoice but inclusive of retention or any other deductions made by the Main contractor on payment certificate. I hope this will bring you an easy way to understand.
Zahid (Finance Manager) 16 April 2018
Here are some of testified links you may refer for any relative questions.
https://gulfnews.com/business/economy/vat/vat-s-up-babu-your-uae-vat-questions-answered-1.2144163 (For quick access to retention clause just open the link and then press Ctrl+F then type retention.)
M. Ahmed Mahmood 05 May 2018
Dear all If we will calculate the vat on the net value,or on the gross value the vat amount would be the same at the end of the project; So according to me both methods seem to be perfect.
I will prefer to calculate on the net value.
Zahid (Finance Manager) 06 May 2018
Rajesh Khanna, I got your point. Once you have charged 5% Vat on Advance Money Receipt shall be out of the scope of VAT when progressive invoices are charged, as the same has already been charged to VAT upon advance payment receipt.
So it will be Gross Amount Less Advance Money (Already Charged to VAT before).
Zahid (Finance Manager) 06 May 2018
As per Federal VAT Law from 01 Jan 2018 onwards, the VAT is applicable on specified taxable Goods and Services. The basic tax point for services is the date on which the performance of service is complete, but overrides if the money is received earlier than the performance of service, which clearly states VAT will be chargeable either receipt or due whichever is earlier.
However if you calculate VAT on Net amount you might will suffer, suppose a project completes after 2018, but partly or almost 90% executed in 2017 that means you have already charged 90% of retention money before 2018 and but at the time of handing over in 2018 you will charge 100% of the retention money, so on which amount you gonna calculate the VAT on whole amount of retention or on the retention which relates to 2018?? Of course on the retention which relates to 2018.
This is why, to avoid such problem it is better to calculate vat on gross instead.
M. Ahmed Mahmood 06 May 2018
Thank you for your valuable words, could you please share me your contact detail email id or whatsapp, so that i may send you tax invocies in order to get clarification further over this topic,
I have alerady showed the tax invocie to one tax consultant, so he clearly informed me that this invoice is perfect.
Thank you again for your valuable words,
aa vertex 28 April 2019
Appreciate the Question you asked on UAE VAT.
The VAT in UAE on any means, whether it a construction, Beverage or whatever. 5% will be figured out in terms of the service as VAT in UAE. Well, if you fail to follow up the VAT Registration in UAE procedure or VAT filing, the percentage of fine will be considered. But, the percentage of VAT remains the same.