EXEMPTION OF GOLD AND DIAMOND TRADING FROM VAT
In many Middle Eastern Countries, diamond trading is considered as a crucial part of the economy since gold, diamond and precious metals sectors is considered as one of the vital national economic sectors and is important for economic diversification. The governing bodies are always looking for the ways in order to make the things easier for the traders as well as retailers.The introduction of VAT in UAE on 1st January,2018 resulted in decline of sales from 50% to 60% in the first quarter. This was because under the earlier VAT rules gold investment bars and loose diamond stones were zero rated but all the other transactions in relation to wholesale and retail came under the 5% VAT regime.
EXEMPTION OF VAT IN BUSINESS TO BUSINESS TRANSACTIONS FOR GOLD/VAT TREATMENT FOR GOLD AND DIAMONDS
In order to recover from the declining sale of gold, the UAE Cabinet adopted a law in order to introduce VAT Reverse Charge Mechanism for the investors in gold and diamond as well as precious metals. The proposed changes mean that VAT would be levied only on the making charges ( value addition) and not on the gold value.
VAT TREATMENT FOR GOLD AND DIAMONDS
Where the business supplies gold or diamonds to a VAT registered recipient and the recipient purchases the goods in order to either resell , produce or manufacture gold and diamond based products, then the supplier would not be required to account for VAT on such sales or report in its own VAT return.
The VAT registered recipient would instead be required to account for tax and to include the output tax which is due on the supply on its VAT return. The recipient would further recover VAT on the supply on the same VAT return which would be subject to the normal input tax recovery position. Thus as a result of it, the fully taxable business would purchase gold and diamonds for resale, production or manufacture and would not make payment of VAT which is due on the supply.
Furthermore for this purpose, the Almas Tower would be declared as a designated free zone for VAT in order to implement it with a digital fencing rather than physical fencing. This would enable these towers to obtain all concessions/ special treatments that are stipulated for the “ designated free zone” as per the Executive Regulations.
SCENARIO BEFORE THE EXEMPTION
The diamond, gold and precious mineral traders before exemption had to charge the tax on goods and services on their customers. For this, they had to recover VAT for their purchases from the suppliers and record their transaction for easier auditing. Further, the VAT registered business were also taxed to note the amount of tax that they have levied and the fees which they’ve usually paid to the government.
GOODS ON WHICH THIS MECHANISM WOULD NOT APPLY
Goods which are subject to the zero rate tax would not be under the ambit of this mechanism:
- Export of gold, diamonds and products where the principal component is gold or diamond
- Supplies of investment precious metals
BENEFITS OF THE EXEMPTION
- This step would allow the investors in gold, diamond and precious metals to conduct business with ease and would also contribute in stabilising the gold and diamond sector in the UAE as well as stimulating investment in the sector.
- It would further facilitate the investors for investors and would contribute to the stabilisation of the country’s oil and diamond sector as well as stimulate investment.
- The wholesale jewellery sector would see a major revival of sales as the emirate would reinstate its appeal as the most competitive global jewellery sourcing hub since only 10% of the gold which is imported into Dubai is consumed locally and the rest is re exported.
- This mechanism records VAT on wholesale transactions in the business accounts without any actual debit or payment which would ease the cash flow on the part of the retailers as they will not have to worry about their final tax liability as well.
CONDITIONS WHICH ARE MUST FOR A TRANSACTION
- On the date of supply, the recipient must be registered for VAT with the FTA
- The purchase should be made with an intention to resell the supplies or use them to manufacture or products where the principal component is of gold or diamonds.
- The recipient should declare to the supplier(in writing) that he/she is registered with the FTA at the date of supply and that his/her intention for purchasing the supplies is to resell them or to produce or manufacture the products where the principal component is of gold or diamonds.
- The intention to account for tax on this supply must be stated by the recipient in his/her tax return.
OBLIGATIONS OF THE SUPPLIER
The supplier needs to fulfill the following obligations before applying the mechanism:
- To obtain a written declaration from the recipient, the template which would be provided by FTA
- To confirm that the recipient is registered for VAT as per the validation checks which is provided by the FTA
The VAT rollback even though a partial one would be of a particular significance since Dubai is known for its close association with the allure of gold. The 5% VAT plus the 5% import duty had eroded much of the price advantages jewellers as compared to what they were in India and the rest of the subcontinent. But the move that has been announced by the UAE could set off a gradual revival in consumer sentiments for gold and diamond jewellery purchases and the jewellery retailers would pass on the VAT benefits which they receive from the wholesalers in setting the price on the pieces. In this way the shoppers would receive their share of the benefits.