Revised tax rules restrict recovery of VAT on employee expenses, putting additional pressure on labour-intensive companies
Indian businesses operating in the United Arab Emirates (UAE) are reviewing their costs, employment contracts and tax procedures following revised value-added tax (VAT) rules that restrict the recovery of tax on certain employee-related expenses.
The changes, which took effect on October 1, 2026, could increase annual operating costs for companies employing large workforces, particularly in construction, manufacturing, hospitality, retail and logistics.
Indian companies account for an estimated 20-25 per cent of businesses in the UAE, with more than 265,000 operating in the country as of June 2025, according to figures cited by The Economic Times.
The revised framework allows VAT recovery on six categories of employee-related expenses, subject to specific conditions. These include certain transport costs, food and beverages at remote locations, operational accommodation, temporary accommodation for new employees, mobile phone and internet services, and work-related parking.
However, businesses must meet stricter requirements to claim tax credits. For instance, companies seeking to recover VAT on work phones, data packages and home internet may need written usage policies, evidence of employer monitoring and records of non-compliance.
A separate provision restricts the recovery of input VAT on purchases paid, or intended to be paid, in cash above a threshold yet to be prescribed by the UAE finance ministry.
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Tax experts say the uncertainty and short implementation timeline have left businesses with limited time to adjust their arrangements
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The Federal Tax Authority published detailed conditions on September 28, just three days before the changes came into force
Priyanshi Chokshi, an international tax advocate, said labour-intensive Indian businesses could face a substantial financial impact because of their spending on employee accommodation, transport and communications.
For a company with 500 employees, additional annual costs could range from AED 37,500 to AED 100,000 if 25 per cent of the VAT previously recoverable on employee-related expenditure becomes ineligible, depending on its spending patterns.
Companies are now reviewing staff benefits, employment contracts, accounting procedures and supporting documentation to ensure compliance. Tax specialists warn that claims could be rejected if businesses fail to meet the revised conditions, even where expenses serve legitimate business purposes.
The final financial impact will depend on the nature of employee benefits, the proportion of expenses affected and how effectively companies adapt to the new requirements.
