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 emirates have narrowed the scope for recovery of employee spends, 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 expenses 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. Also, a “crucial threshold for cash transactions remained unspecified,” she added.
While the rules apply to all businesses operating in the UAE, Indian companies account for about 20-25% of total businesses at over 265,000 as of June 2025, making the changes significantly 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.
The revised framework specifies six categories of employee-related expenses for which input VAT may be recovered, subject to conditions. They include certain transportation costs, food and beverage 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 if mentioned in the contract, and seen as necessary for employees to perform their roles. Under the revised rules, food and beverage expenses must meet the conditions applicable to remote locations.
Work phones, data packages and home internet expenses also may require a written usage policy, evidence of employer monitoring, and records of non-compliance.
“Indian companies with UAE subsidiaries may need to conduct a transaction-level review of staff expenses incurred from October 1, amend benefit policies and temporarily flag large cash purchases until the implementing threshold is announced,” Chokshi said.
Tax experts are working with companies to identify which employee-related expenses that previously qualified for VAT recovery have become irrecoverable.
“Businesses had very limited time to revisit existing arrangements,” said Yeeshu Sehgal, who leads tax firm AKM Global’s Dubai practice. “There is certainly a risk of increased losses through increased operation costs, although it is too early to quantify actual losses across Indian companies,” he said.
Chokshi said the potential financial exposure would vary with the nature and scale of employee-related spending. For a labour-intensive company with 500 employees, taxable expenditure on employee benefits and services could range from AED 3 million to AED 8 million annually, generating AED 150,000 to AED 400,000 in input VAT. “If, say, 25% of that input VAT becomes ineligible for recovery under the revised conditions, the additional annual cost could range from AED 37,500 to AED 100,000. If half becomes ineligible, the cost could rise to AED 75,000 to AED 200,000,” she said.
Sahitya K Chaturvedi, head of accounts and finance at Dubai-based luxury fragrance company Ajmal Perfumes, said, “The test most firms will fail is the cash option.”
According to him, at 5%, a company spending AED 10 million a year on staff benefits has about AED 500,000 at stake. “For labour-intensive sectors like retail, manufacturing, construction and hospitality, that is a real margin hit,” Chaturvedi added.
Rajat Mohan, managing partner of AMRG Global, said the VAT amendment called for a deeper review of employment contracts, HR policies and staff accommodation arrangements. “Even larger companies have not analysed this as of now, and have started discussions around this. This month most companies will do a gap analysis,” he said.
The impact is likely to be higher for construction, hospitality, facilities management, logistics and manufacturing companies that directly arrange accommodation, meals and transport for large workforces, and lower for office-based businesses where employees receive cash allowances or arrange their own accommodation and commuting.
Beyond the potential tax cost, companies will need to examine contracts, HR policies, cash-alternative clauses and usage records category by category, Chokshi said. “The practical risk is that VAT may be denied not because the expenditure lacks a business purpose, but because a specific condition or supporting document is missing,” she said.
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