Every nation has laws and regulations that require its residents to pay taxes. If citizens of a nation utilise the services and facilities provided by the government, then there is no exemption on the payment of the tax.
Individuals or corporations pay taxes to different parties on different occasions, but ultimately the collected tax ends up in the hands of the government. In exchange, the government uses the money to develop the nation by constructing critical infrastructures like roads, hospitals, and schools. This tax revenue is also used by the government to pay its workers and employees.
The purpose of taxation is not always to generate funds for the government; rather, it is occasionally used to regulate the consumption of goods among its citizens. For instance, the likelihood that a single person will purchase a commodity in large quantities increases when there is no tax on the goods. The taxes regulate the purchase rate to keep the product accessible to other users.
In the paragraphs that follow, we’ll go into further detail on the two types of taxes i.e. Direct and Indirect Tax.
1. DIRECT TAXES
What are Direct taxes?
Direct tax and indirect tax are two sides of the same coin, however, there are differences when it comes to when, how and from whom these taxes are collected.
Direct taxes are those taxes that an individual/ corporate business pays to the government on their own behalf, without any third person. Direct tax includes Income tax and corporate tax. For now, in the UAE there is no requirement for individuals to pay income tax. But a company or body corporate has to be direct tax. The corporate tax is a newly introduced direct tax that will be implemented from June 30, 2023. Businesses are subject to corporate tax on the profit earned by them during the financial year. The business/taxpayer’s profit generated determines the amount of tax it needs to pay. The higher the profit, the higher the tax amount that it needs to pay.
There are four types of Direct taxes:
- Income Tax – Tax levied on a variety of sources of income, including capital, labour, industrial and commercial enterprises, or liberal professions. Each of these sources generates an income known as sub-income or specialised income. Not currently levied in the UAE.
- Capital Tax – Also known as Wealth Tax is the tax levied on a person’s capital, which consists of their movable, intangible, real estate properties, and tangible financial assets. Not currently levied in the UAE.
- Corporate Tax – The tax that an organisation must pay at the end of the year is what we call Corporate Tax. The total revenue or profit generated by the organisation during a financial year determines the amount of tax owed to the government. Introduced from June 30, 2023.
- Transfer Tax – Applicable to real estate transactions. Depending on the value of the property, the individual transferring ownership of it must pay the government a set amount of tax. Not currently levied in the UAE, but a property registration tax is payable by the buyer which is a percentage of the purchase price.
Benefits of Direct Taxes
- Every taxpayer pays in accordance with its mandate because of the principles of tax justice that are in place.
- As direct taxes depend on factors like profit – their outcome is reasonably stable.
- The ability of the government to reach an adequate payment base is greater when it comes to direct taxes.
- Direct tax collection is simple and easy because there are only two parties involved: the individual taxpayer business and the tax authorities.
- It ensures social fairness since it is levied in accordance with income levels or profit margins.
- Direct taxes are a crucial instrument, to counteract social inequities brought on by income and wealth.
- It has no impact on the relative prices of products and services, nor does it influence the allocation of resources. Thus preserving the disparity in the profitability of different industries.
- There is some flexibility in direct tax revenues, as these revenues could increase dramatically as the national income does.
2. INDIRECT TAXES
What are Indirect Taxes?
The tax collected for the government through an intermediary is known as Indirect tax. This type of tax includes Value-Added Taxes (VAT), taxes on imports, exports, production, excise duties, customs duties, taxes on the sale of crude oil products, banking tax, mining tax etc.
The most well-known example of Indirect Tax is Value-Added Tax (VAT), which is borne by the consumer in full. Retailers and Points of Sale (PoS) are responsible for collecting VAT.
Some nations may opt to exempt some essential goods and services from indirect taxes in order to reduce the burden on consumers, or they may resort to raising indirect taxes on specific commodities to discourage use because they are bad for the general welfare.
There are three types of indirect taxes:
- Excise duty – these are taxes levied by the government to reduce the consumption of certain goods. Excise tax currently is levied on sugary drinks and tobacco products.
- Customs duty – Products and services produced outside a country’s jurisdiction are subject to customs tax. These taxes are applicable to imported goods.
- Value Added Tax (VAT) – VAT is applicable at every stage of the production process. From raw materials to the final product, various entities collect the VAT tax at various points in time.
Benefits of Indirect Taxes
- Indirect tax impacts all income classes. Regardless of their income, all customers or buyers are subject to indirect taxes like VAT and excise.
- Consumption of goods injurious to public health can be reduced by implementing the indirect tax. For instance, the government discourages the consumption of dangerous goods like alcohol or cigarettes by levying excise taxes on them.
- Individuals often remain unaware of indirect taxes as they are part of the final retail prices of goods. The indirect tax’s impact on the consumer is only partially felt as they are only aware of the entire cost.
- Indirect taxes increase the government’s revenue, broaden the tax base, and compel all individuals to make contributions to the National Fund.
What should you do next?
While there is a paradigm shift occurring in the UAE when it comes to taxation, the tax functions of each organisation play an important role. The choices you make today will have a considerable impact on your organisation’s future. Therefore, making wise financial decisions supported by solid tax counsel is of the utmost importance.
With Nair & Nelliyatt Chartered Accountants, your business will benefit from the direct tax and indirect tax services provided by our knowledgeable professionals, adapted to match various industry and financial frameworks. Contact us today to know more about the types and amount of direct and indirect tax you are liable to pay and thereby prevent any future tax-related complications.
There are four types of Direct taxes:
- Income Tax – Tax levied on a variety of sources of income, including capital, labour, industrial and commercial enterprises, or liberal professions. Each of these sources generates an income known as sub-income or specialised income. Not currently levied in the UAE.
- Capital Tax – Also known as Wealth Tax is the tax levied on a person’s capital, which consists of their movable, intangible, real estate properties, and tangible financial assets. Not currently levied in the UAE.
- Corporate Tax – The tax that an organisation must pay at the end of the year is what we call Corporate Tax. The total revenue or profit generated by the organisation during a financial year determines the amount of tax owed to the government. Introduced from June 30, 2023.
- Transfer Tax – Applicable to real estate transactions. Depending on the value of the property, the individual transferring ownership of it must pay the government a set amount of tax. Not currently levied in the UAE, but a property registration tax is payable by the buyer which is a percentage of the purchase price.
Benefits of Direct Taxes
- Every taxpayer pays in accordance with its mandate because of the principles of tax justice that are in place.
- As direct taxes depend on factors like profit – their outcome is reasonably stable.
- The ability of the government to reach an adequate payment base is greater when it comes to direct taxes.
- Direct tax collection is simple and easy because there are only two parties involved: the individual taxpayer business and the tax authorities.
- It ensures social fairness since it is levied in accordance with income levels or profit margins.
- Direct taxes are a crucial instrument, to counteract social inequities brought on by income and wealth.
- It has no impact on the relative prices of products and services, nor does it influence the allocation of resources. Thus preserving the disparity in the profitability of different industries.
- There is some flexibility in direct tax revenues, as these revenues could increase dramatically as the national income does.
2. INDIRECT TAXES
What are Indirect Taxes?
The tax collected for the government through an intermediary is known as Indirect tax. This type of tax includes Value-Added Taxes (VAT), taxes on imports, exports, production, excise duties, customs duties, taxes on the sale of crude oil products, banking tax, mining tax etc.
The most well-known example of Indirect Tax is Value-Added Tax (VAT), which is borne by the consumer in full. Retailers and Points of Sale (PoS) are responsible for collecting VAT.
Some nations may opt to exempt some essential goods and services from indirect taxes in order to reduce the burden on consumers, or they may resort to raising indirect taxes on specific commodities to discourage use because they are bad for the general welfare.
There are three types of indirect taxes:
- Excise duty – these are taxes levied by the government to reduce the consumption of certain goods. Excise tax currently is levied on sugary drinks and tobacco products.
- Customs duty – Products and services produced outside a country’s jurisdiction are subject to customs tax. These taxes are applicable to imported goods.
- Value Added Tax (VAT) – VAT is applicable at every stage of the production process. From raw materials to the final product, various entities collect the VAT tax at various points in time.
Benefits of Indirect Taxes
- Indirect tax impacts all income classes. Regardless of their income, all customers or buyers are subject to indirect taxes like VAT and excise.
- Consumption of goods injurious to public health can be reduced by implementing the indirect tax. For instance, the government discourages the consumption of dangerous goods like alcohol or cigarettes by levying excise taxes on them.
- Individuals often remain unaware of indirect taxes as they are part of the final retail prices of goods. The indirect tax’s impact on the consumer is only partially felt as they are only aware of the entire cost.
- Indirect taxes increase the government’s revenue, broaden the tax base, and compel all individuals to make contributions to the National Fund.
What should you do next?
While there is a paradigm shift occurring in the UAE when it comes to taxation, the tax functions of each organisation play an important role. The choices you make today will have a considerable impact on your organisation’s future. Therefore, making wise financial decisions supported by solid tax counsel is of the utmost importance.
With Nair & Nelliyatt Chartered Accountants, your business will benefit from the direct tax and indirect tax services provided by our knowledgeable professionals, adapted to match various industry and financial frameworks.Contact us today to know more about the types and amount of direct and indirect tax you are liable to pay and thereby prevent any future tax-related complications.
