Difference Between Direct and Indirect Taxes

Introduction

Understanding the difference between direct and indirect tax is crucial for individuals and businesses operating in the UAE. While the UAE is known for its business-friendly tax environment, some taxes such as Value Added Tax (VAT) and Excise Tax apply to specific goods, services, and income sources.

This comprehensive guide by Flyingcolour Tax India explains the meaning, structure, and major differences between direct and indirect taxes in the UAE, with examples and insights relevant to entrepreneurs, professionals, and investors from India.

What Are Direct Taxes

A direct tax is a tax paid directly by an individual or organization to the government. It is imposed on income, profits, or wealth and cannot be shifted to another person. The burden of paying a direct tax falls solely on the person or entity on whom it is levied.
In countries with income tax systems, examples include personal income tax and corporate tax. Although the UAE has no personal income tax, corporate tax applies to businesses with a certain profit threshold.

Examples of Direct Taxes in the UAE:

Corporate Tax: Introduced in 2023 at a standard rate of 9% on business profits exceeding AED 375,000.

Withholding Tax (limited application): Imposed on specific cross-border payments to non-residents.

Characteristics of Direct Tax:

• Paid directly to the government.
• Based on income or profits.
• Non-transferable to others.

Promotes equity, as higher-income earners pay more.

What Are Indirect Taxes

An indirect tax is a tax collected by an intermediary, such as a retailer or service provider, from the person who bears the ultimate economic burden of the tax. The consumer pays the tax as part of the price of goods or services, and the intermediary passes it to the government.
In the UAE, indirect taxes are the primary form of taxation, including VAT and Excise Tax.

Examples of Indirect Taxes in the UAE:

• Value Added Tax (VAT): Introduced in 2018 at a standard rate of 5%, applied on goods and services at every stage of the supply chain.
• Excise Tax: Levied on harmful products like tobacco, energy drinks, and carbonated beverages to discourage consumption.

Characteristics of Indirect Tax:

• Added to the price of goods and services.
• Collected by intermediaries.
• Burden can be shifted from sellers to buyers.
• Regarded as regressive, as it affects all income groups equally.

Key Difference Between Direct and Indirect Tax

The following comparison table highlights the difference between direct and indirect tax in the UAE context:

Key Benefits of Understanding the Difference:

• Better compliance with UAE tax regulations.
• Improved financial transparency.
• Enhanced business decision-making.
• Efficient tax planning and cost management.

Examples to Differentiate Between Direct and Indirect Tax

To clearly differentiate between direct tax and indirect tax, consider the following examples:

• Direct Tax Example: A UAE-based company earning profits above AED 375,000 pays 9% corporate tax directly to the Federal Tax Authority (FTA).
• Indirect Tax Example: A customer purchasing electronics in Dubai pays 5% VAT on the price, which the retailer later remits to the government.

In simple terms, direct taxes are paid on income earned, while indirect taxes are paid on money spent.

The Role of the Federal Tax Authority (FTA)

 Federal Tax Authority (FTA) is responsible for managing, collecting, and enforcing taxes across the UAE. It ensures compliance, provides clarity on tax regulations, and implements tax reforms that support the country's vision for a sustainable economy.

The FTA also facilitates digital filing and registration for VAT and corporate tax, ensuring that individuals and companies can fulfill their tax obligations efficiently.

How Flyingcolour Tax India Can Help

Flyingcolour Tax India specializes in helping Indian entrepreneurs and businesses understand and comply with UAE tax regulations. Our experts provide professional assistance with:

• Corporate tax registration and compliance.
• VAT and Excise Tax registration and filing.
• Cross-border tax structuring and planning.
• Business accounting and financial advisory.

With a deep understanding of both UAE and Indian tax frameworks, Flyingcolour Tax India ensures that businesses operate efficiently and remain compliant while maximizing profitability.

Frequently Asked Questions (FAQs)

1. What is the main difference between direct and indirect tax?

Direct tax is paid directly to the government on income or profit, while indirect tax is collected on goods and services and passed on to the government by intermediaries.

2. Is VAT a direct or indirect tax in the UAE?

VAT is an indirect tax applied to goods and services at every stage of the supply chain.

3. Does the UAE have income tax?

No, the UAE does not levy personal income tax on individuals. However, corporate tax applies to companies earning above the specified profit threshold.

4. What is the rate of corporate tax in the UAE?

The UAE corporate tax rate is 9% on business profits exceeding AED 375,000.

5. Why does the UAE focus more on indirect taxes?

Indirect taxes such as VAT and Excise Tax generate consistent revenue for the government while maintaining the UAE’s reputation as a low-tax business hub.

To learn more about Difference Between Direct and Indirect Taxes, book a free consultation with one of the Flyingcolour team advisors.

Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.