At this stage, it is vital for the reader to understand certain simple terminologies:
1. The Primary Sector: The primary sector provides producers with raw material necessary for the production process. It is often referred to as the first stage of the production process. Examples include the forestry industry where timber is produced; refineries where fuel and oil products are synthesized, smelters where ingots of metals are molded and many other industries that produce the necessary material for the production process.
2. The Secondary Sector: As the phrase states, the secondary sector represents the next (second) stage of the production process where goods are mantled, integrated and put together in what may seem like a highly sophisticated manner. The technological progress has played major roles in enhancing the secondary stage, where secondary material is produced not only in a timely manner, but also with a high degree of precision and accuracy. Although the secondary stage does not produce final products for consumption, it does, however, play vital roles in continuing the production process. The goods produced in the secondary stage are passed on to the other producers in the third stage, named the Tertiary Sector.
3. The Tertiary sector: This is the third stage of the production process where goods and services are sold to final users. Once final goods are completed based on primary and secondary, the tertiary sectors prepare to complete them in order for the consumer to enjoy their use. Distribution channels/networks are used to cater transportation and logistics to facilitate deliveries to different geographic locations where goods are retailed.
4. Quaternary stage of production: This is a fairly modern terminology introduced to the production process. In the past, the production process was thought to end in the tertiary sector where goods and services reach the customer through distribution channels conventionally. The Quaternary stage, however, introduced notions of innovations and developments into the production process where know-how enhances production, utilizes technology and ultimately adds on to quality of produced output.
5. Distribution channels/networks: These are usually separate entities specialized in breaking the bulk apart. It is usually uneconomic for a manufacturer to retail its output directly to customers. Manufacturers thus seek entities to manage reducing the bulk into smaller magnitudes by resorting to specialized distributors who, in turn, divide the manufactured bulk into smaller chunks. Distributors will then resort to smaller wholesalers who reduce the bulk further before passing small packaged units ready for sale to final users (consumers/household). In that case, the distribution network will start with a manufacturer abroad who passes simultaneously to a distributor in the manufacturing organ, followed by the distributor and finally to the exporting agent. The exporting agent will then establish contact with and importing agent (distributor in the importing country) who will continue the distribution process conventionally.
6. Customs and Duty: C&D are unrelated to any type of domestic tax. In other words, Customs and duty are amounts of tax paid on imported good. To make a clear distinction, when goods are imported, a separate tax is paid on their arrival. VAT will then be added over and above C&D and will be calculated on the basis of the final value of the good after integrating customs and duties paid on its importing process.
7. Output: The term output refers to quantities of goods produced, imported or purchased locally for resale. The term output also stems from quantities of final goods ready for sale. Output emerges from a series of complicated production processes that involves input including both raw material and labour, that’s engaged in all four stages of the production process.
8. Demand: Demand is a simple jargoned term used in economics. It simply refers to the readiness, willingness and ability of a consumer, or buyer, to obtain a good or a service at a certain period of time. Demand is instigated by the price of the good or service and its general rule is: The higher is the price, the lower is the tendency for a buyer to buy. Price is not the only factor that demand depends upon (other factors include the price of other goods such as substitutes and complementary goods, fashion (taste), changes in income in the economy, population trends, advertising and level of bank interests). Nevertheless, price of the good itself remains the main basis that determines quantity demanded.
9. Supply: This is another jargoned term in economics which is basically the readiness, willingness and ability of a producer (or seller) to sell a good or service at a certain period of time. Since the majority of sellers are motivated by high volumes of sales and profits, the rule of supply is naturally: The higher is the price offering by the market, the higher is the quantity produced and supplied. Although supply is motivated mainly by price offering, there are other factors that affect the ability of producers to produce. These factors include fluctuation of prices of raw material (commodities), advanced technology and other factors external to economics that may inevitably affect prime sectors (flood, drought etc…)
10. Commodities: Commodities are base goods produced in the primary sector. They include and not limited to; wheat, sugar, soya, cocoa, timber, metals, crude oil and many others produced in the primary sector.
11. Input: Raw material and labor combined to produce an output.
12. Exchange rates: These refer to values of a domestic currency versus foreign currencies. There are currencies that are pegged (fixed) to hard currencies such as the US Dollar. Floating currencies are those currencies that fluctuate against other currencies.
13. Government Expenditure: GE is the amount that governments spend on their economy. These include spending on the infrastructure to improve the welfare of the economy. Government usually spend from Income tax (direct tax) received from individuals (percentage on wages) and enterprises (percentage of net profits)
14. Income tax: Independent of any other indirect tax such as VAT, income tax represents the main pillar for government expenditure and redistribution of income in the economy. Income tax is used as a governmental financial reservoir where tax receipts are re-injected back into the economy as governmental service, pensions, unemployment benefits, health services, education and other infrastructure improvements.
15. Budget deficit: A situation where governments spend more than what they received from income tax and other revenues.
16. Budget surplus: A situation where governments have excess remaining from tax after spending vis-à-vis spending a volume less than the volume of tax received.
17. Fiscal policy: A tool used by the government to correct inflation or an employment. FP is practiced through adjusting the levels of government expenditure or percentage of income tax in order to control the volume of money circulating in the economic system. At times of inflation (high prices), the government may act using FP to lessen expenditure in order to reduce money circulating in the system which, in turn, leads to lower aggregate (total) demand in the economy; This eventually corrects inflation as prices will eventually fall. On the other hand, if the economy is facing unemployment, governments will engage an easing FP by spending to create jobs. Easing also includes lowering income tax to allow for higher disposable income.
18. Monetary policy: Monetary policy is another tool for correcting economic syndrome such as inflation or unemployment. However, this policy is exercised by a government subsidiary; mainly, the Central Bank. Monetary policy works on correcting economic imbalances through altering interest rates. At times of inflation, the central bank aims at lifting interest rates to reduce spending. On the contrary, interest rates are relaxed at times of unemployment to encourage spending and in turn, creating jobs.
19. Supply side policy: This is yet another government policy used to adjust economic syndromes. Supply side is a simple tool in which governments adjust flexibility in light of inflation or unemployment.
20. Abenomics: This is a modern approach in using policy. Abenomics is a collective policy where all three policies are used simultaneously to correct economic instabilities.
21. Disposable Income: DI is the income available to an individual/entity for spending after deducting income tax.
22. GDP: Gross Domestic Product is the total output produced within a domestic (internal) economy.
23. GNP: Gross National Product is the total output of an economy including net transfers from abroad.
24. Tariffs: Tax imposed on imported goods to protect domestically produced output.
25. Quotas: Limiting the quantity of imported goods in a move to protect domestically produced output.
VAT Specific Terminologies:
26. Reverse Charge Mechanism: this is the process of importing, declaring and paying VAT on services or goods that do not physically cross the border through the customs, then at the same time, claiming the same Tax from the FTA. In other words, the importer of goods or services is paying for the output tax on behalf of the non-resident importers. Accounting wise, this procedure does not entail any cost on the economic entities since the declaring such an import will not carry any payment unless import is a non-taxable item.
27. Cascading Effect: A tax that is levied on goods and/or services at each stage of the production process up to the point of being sold to the final consumer. A cascade tax is a type of turnover tax with each successive transfer is being taxed inclusive of any previous cascade taxes levied. Since each successive turnover includes the taxes of all previous turnovers, the end tax amount will be greater than the cascade tax rate.
28. FTA: As in Federal Tax Authority, this authority shall be in charge of managing and collecting federal taxes and related fines, distributing tax-generated revenues and applying the tax-related procedures enforced in the UAE.
29. Input Tax: Input tax is the VAT levied by your supplier on invoices issued to you. Your company pays the VAT to the supplier and on the other hand claims it back from the authorities at the time of the tax filing. Companies can reclaim the input tax through Tax Refunds filed with the proper authorities
30. Output tax: Your Company Levies Output tax on its clients through the invoicing process, Output VAT must also be calculated when you withdraw goods or services for private use. You should transfer this tax in full to the FTA through the tax filing.
31. Place of Supply: The place of supply is crucial when calculating the tax since it determines which authority the taxpayer should pay the due taxes under. For Goods, the place of supply should be the location of goods when the exchange takes place. For services, the place of supply should be where the supplier is established.
32. Zero Rated Tax: meaning that a supplier issues an invoice showing a NIL VAT, usually such a rate is applied to export (for non-GCC markets) and essential goods and services, like education and healthcare.
33. Exempt from Tax: meaning that the transaction does not entitle any VAT whatsoever. The UAE legislation had so far considered some financial services, residential properties, land and local transport under this category.
34. VAT Grouping: The process in which several companies group themselves to be considered as one taxable entity versus the local tax authority. This will enable the VAT group to consider all internal transactions as exempt from tax.
35. Bad Debt: Since VAT is applied on invoicing, this is one of the major concerns of local traders; this means that the output tax is automatically calculated upon invoice issuance, keeping the risk of collection totally on the tax subject. Taking into consideration that the subject’s client defaults for any reason, the entity will be bearing its own loss as well as the VAT levied. What is learned from the published materials, a special legislation will allow the companies to claim back the amount of output VAT paid “under certain circumstances”.
36. VAT Refund: it is the procedure of refunding the tax back from the authorities. Usually, the payment of output tax does coincide with the claim of the input tax meaning that the tax subject nets off the output – the input tax. Usually, authorities contact the tax subject further down the line to claim further documents and proofs related to the amounts declared in the subject’s forms, this is done to control any fraud and tax evasion.
37. Taxable Supply: a taxable supply can be defined as a sale of taxable goods and/or a delivery of taxable services. An import of taxable goods is also a taxable supply. Taxable means that VAT is applied on these transactions.
38. Pro rata Temporis: It is a Latin word referring to a proportion of something over a period of time. Commonly used as Pro rata only. Pro rata is commonly used in accounting and Insurance to allocate a cost or an income over a certain period of time.
39. Work In Progress: WIP refers to partially-completed goods that are still in the production process. These items do not include raw materials or finished goods.
40. Taxable Person: A person that conducts an Economic Activity independently for the purpose of generating income and who is registered to VAT.