Difference between zero rate, exempt and out of scope supplies in UAE VAT
Under UAE VAT, it is easy to get confused between zero rate, exempt and out of scope supplies. While the end result of all these supplies is the same, i.e. VAT is not charged on these supplies, it is important to know the real difference between these supplies. This is also important from a reporting perspective, because in VAT returns, a clear bifurcation of the value of each of these supplies is required to be furnished.
Let us understand the difference between these supplies from the table below:
|Zero rate supplies||Exempt supplies||Out of scope supplies|
|Meaning||Zero rate supplies are taxable supplies, on which VAT @ 0% should be charged.||Exempt supplies are specific supplies which have been declared as exempt. On these supplies, VAT should not be charged.||Out of scope supplies are supplies which are kept out of the purview of VAT|
|Input tax recovery||These are considered as taxable supplies. Hence, input tax can be recovered on supplies used to make zero rate supplies||Input tax cannot be recovered on supplies used to make exempt supplies||As out of scope supplies are out of the purview of VAT, there is no concept of input tax recovery on such supplies|
|Examples||1.Export of goods to non-GCC VAT implementing States
2.Export of services to outside the GCC territory
3.Supply of precious metals
|1.Supply of specific financial services
2.Supply of bare land
3.Supply of local passenger transport
4.Supply of residential buildings through sale or lease, other than those which are zero rated
|1.Supplies by persons not registered under VAT
2.Specific supplies by the Government
Hence, as you can observe, though VAT is not charged on any of these supplies, a major difference between these supplies is that input tax recovery is allowed for zero rate supplies and not allowed for exempt supplies. There is no concept of input tax recovery in case of out of scope supplies, as they are kept out of the purview of VAT. Also, the reasons for non-levy of VAT on these supplies is different. It is important to know the difference between these supplies so that VAT returns can be filed accurately and input tax can be recovered only on eligible supplies.