UAE VAT: Zero-Rating vs Exemption
This is one of the most commonly misunderstood VAT concepts. The distinction has a significant impact on your ability to recover input VAT.
Zero-Rated Supplies (0% VAT)
- VAT is charged at 0% — so the customer pays no VAT
- But the supply is still taxable
- This means you can recover input VAT on costs related to making zero-rated supplies
- You must report zero-rated sales in your VAT return
Examples of UAE zero-rated supplies:
- Exports of goods outside the UAE
- International transport services
- Supply of certain investment-grade precious metals
- First supply of a new residential building
- Certain healthcare and education services
- Supply of crude oil and natural gas
Exempt Supplies
- VAT is not charged at all
- The supply is outside the scope of taxable activity
- You cannot recover input VAT on costs that relate to making exempt supplies
- Exempt income must still be reported on the VAT return
Examples of UAE exempt supplies:
- Local passenger transport (taxis, metro, buses)
- Bare land
- Residential property (subsequent sales)
- Certain financial services (loan interest, insurance premiums)
- Life insurance policies
Why It Matters: Partial Exemption
If your business makes both taxable (including zero-rated) and exempt supplies, you can only recover a portion of your input VAT. This is called partial exemption, and the calculation is based on the ratio of taxable supplies to total supplies.
Getting this wrong can result in either:
- Under-recovering input VAT (paying more than you should), or
- Over-claiming input VAT (resulting in FTA penalties)
Kounted ensures your VAT returns correctly classify all supplies and calculates any partial exemption apportionment.