UAE's VAT reset may hit Indian cos where it hurts
Indian companies operating in the UAE are facing significant financial implications following the United Arab Emirates' recent change in value added tax (VAT) rules. The revised tax regime narrows the scope for recovery of employee-related expenses, potentially resulting in additional costs of hundreds of thousands of dirhams annually for businesses with large staffs.
The Federal Tax Authority issued detailed conditions to address this on September 28, well before the new rules took effect on October 1, leaving little time for affected companies to revise their operations. Indian businesses in UAE account for approximately 20-25% of all businesses with over 265,000 entities as of June 2025, making the impact on them particularly significant.
The revised VAT rules apply a threshold for cash transactions, restricting input-tax recovery for purchases paid or intended to be paid in cash when the value exceeds this limit. Indian companies with staff in UAE need to reassess their tax claims, staff contracts, and operating costs, potentially facing additional annual costs of AED 37,500 to AED 200,000 if 25% or half of the input VAT becomes ineligible for recovery.
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