Dubai, UAE: Ever since the news emerged last June that all the six GCC member states had agreed in principle to introduce value added tax (VAT), the wheels to implement the economic reform were set in motion. With new taxation laws come new challenges, one of them being the lack of understanding the difference between zero-rated and exempt goods or services.

Robert Dalla Costa, VAT Leader at KPMG Lower Gulf, explains the difference between the two: “If it’s zero-rated, it means there is VAT but it’s at zero per cent. If your business makes taxable supplies either at five or zero per cent, it means you get to recover all the VAT you paid for your business inputs. But if you were to make a product that the government says is exempt, it means you will not be allowed to charge VAT and, at the same time, not be allowed to recover the VAT on your business inputs for that particular product.”

Highlighting another problem – the usage of wrong terminology – he says: “Governments sometimes say they’ll exempt basic foods, but that’s not good. What they really mean is they’re going to zero-rate them. In other words, they’ll tax them but at zero per cent. Why? Because if they’re really going to exempt food, that will mean that food suppliers will not be able to reclaim their VAT charges. So what’s going to happen? They’re going to increase food prices, which is not what governments want. And that is why it’s important to understand the difference between something that’s zero-rated and something that’s exempt.”

With VAT mostly likely to come into effect by 2018, there is a need to create more awareness and clarity about the laws for the benefit of businesses and consumers.