Industry Odisha Bureau, Oct 19: Tighter rules on reclaiming VAT on employee spending could increase costs for labour-heavy firms. New paperwork demands add to the compliance burden for Indian businesses in the UAE.
New UAE value-added tax (VAT) rules took effect on 1 October. They narrow how much VAT businesses can reclaim on employee spending. The VAT change could increase costs and the compliance burden for Indian businesses. Firms in construction, hospitality, manufacturing, logistics and retail look most exposed, tax experts say.
The reform does not raise the VAT rate. Instead, it limits input VAT recovery. Businesses pay VAT on purchases and normally reclaim it against VAT they collect. When a claim is disallowed, that tax becomes a straight business cost.
The Federal Tax Authority published detailed conditions on 28 September. That left companies just three days to adjust contracts, staff benefits and tax claims. International tax advocate Priyanshi Chokshi said companies face uncertainty over the new rules.
The rules apply to all UAE businesses, not Indian firms alone. Yet Indian companies make up about 20–25% of businesses there. More than 265,000 were operating as of June 2025. That gives the changes wide reach across Indian business in the Gulf state.
Chokshi expects Indian-owned firms in these sectors to feel a greater impact. They spend heavily on staff housing, transport, connectivity and workforce services, she said. For large employers, experts say extra costs could reach hundreds of thousands of dirhams yearly. The figure depends on how much staff spending no longer qualifies.
The framework lists six types of employee spending on which VAT may be recovered. They cover certain transport costs, food at remote sites and operational accommodation. Temporary housing for new recruits, mobile and internet services, and work parking complete the list. Falling into a category does not guarantee recovery; conditions and records still apply. That could reshape benefits such as staff meals and phone allowances.
Meals show the tightening clearly. Earlier, businesses could recover VAT on food and services provided to staff. Now, food and drink must meet the conditions set for remote locations. Firms may need to separate operational necessities from ordinary staff perks.
Connectivity brings fresh paperwork. Claims on work phones, data packages and home internet may require a written usage policy. Employers may also need evidence of monitoring and records of non-compliance. For large workforces, that adds administrative cost on top of lost tax credits.
A separate amendment targets cash purchases. Recovery is restricted on purchases paid, or meant to be paid, in cash. The curb applies above a value the finance ministry is yet to prescribe. Chokshi flagged that missing threshold as a key gap. Procurement and payment practices may need review meanwhile.
Companies may now revisit expense policies, housing deals and transport contracts. Finance teams may need training, tighter records and fresh budgets. Professional tax advice may become essential for many employers. Pressure on margins and working capital could follow. The UAE remains a key base for Indian enterprise. Clear rules and steady implementation will shape how smoothly firms adapt.
