UAE VAT changes to increase costs and compliance burden for Indian businesses

DUBAI: Indian companies operating in the United Arab Emirates across manufacturing, construction, retail, hospitality and logistics are reassessing operating costs, staff contracts and tax claims, as revised value-added tax (VAT) rules in the UAE have narrowed the scope for recovery of employee spending, tax experts said.

The potential additional cost for labour-intensive businesses could run into hundreds of thousands of dirhams annually for companies with large headcounts, depending on the amount of employee-related expenditure that becomes ineligible for input VAT recovery, they said. The detailed conditions issued by the Federal Tax Authority were published on September 28, just three days before the new rules took effect on October 1, leaving limited time to revise existing arrangements. "Companies operating in the UAE are confronting uncertainty over new VAT rules," international tax advocate Priyanshi Chokshi said. A "crucial threshold for cash transactions remained unspecified," she added.

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While the rules apply to all businesses operating in the UAE, Indian companies account for about 20-25% of total businesses, with over 265,000 operating as of June 2025, making the changes particularly relevant for them. "Indian-owned businesses in construction, hospitality, manufacturing, logistics, and retail sectors could face a greater impact because of their substantial expenditure on employee accommodation, transport, connectivity and workforce-related services," Chokshi said. A separate amendment restricts input-tax recovery on purchases paid or intended to be paid in cash when the value exceeds a threshold to be prescribed by the UAE finance ministry.

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The revised framework specifies six categories of employee-related expenses for which input VAT may be recovered. They include certain transportation costs, food and beverages at remote locations, operational accommodation, temporary accommodation for new employees, mobile phones and internet services, and work-related parking. Under the earlier rules, businesses could recover VAT on food and services provided to employees. Under the revised rules, food and beverage expenses must meet the conditions applicable to remote locations. Work phones, data packages and home internet expenses may also require a written usage policy, evidence of employer monitoring, and records of non-compliance.