How to Calculate VAT in UAE

VAT is a form of a consumption tax that is applied at each stage to all the goods and services as mandated under the VAT Law or Federal Decree-Law No. 8 of 2017. Since its implementation in January 2018, all the businesses in the UAE are responsible for registering for VAT or face hefty penalties according to FTA regulations.

Since VAT is the responsibility of every business, it is essential to learn how to calculate VAT.

How can Businesses Owners calculate VAT in UAE?

The rate of VAT in the UAE is set at 5%, one of the lowest rates in the world. The government of UAE does not collect the tax directly; the companies charge the customers and receive it on behalf of the authorities.

The formula for calculating VAT is:

VAT = Output Tax – Input Tax

Output Tax

Output tax is the amount received by a seller as a percentage of the selling price of the final product. In the context of UAE Vat, the rate is 5%. For example, Selling Price of the Product/service is AED 200, then Output Tax (VAT collected during resale) will be 200x5% = AED 10.00. The output VAT is also called VAT Collected.

Input Tax

The amount paid by a buyer as a percentage of the cost price for goods/services used to make a final product. In UAE VAT standard rate is 5% on invoice value (excluding special cases, e.g., profit margin scheme).

For example, the Cost Price of the goods/services is = AED 100, knowing the VAT rate is 5%, then Input VAT (VAT paid during buying) will be 100x5%= AED 5.00. Input vat is also called Vat Credit or Recoverable VAT.

VAT Payable

All businessmen should collect VAT on sales, also called output tax, and recover VAT amount paid on the purchase of goods, called input tax. Subtracting input tax from output tax will give the amount that has to be paid to the government.

VAT Calculation Explained with an Example

If you are going to file VAT return, you must have clarity of calculating the exact amount of Value Added Tax.  To help you better understand the VAT calculation; below is an example that might help you grasp the idea more:

Company A has purchased raw materials for a total of AED 500,000. Therefore, the input tax will be 5% of the total amount i.e.

AED 500,000 x 5% = AED 25,000

Company A sells the goods made up of the raw materials purchased, assume the total amount of sales is AED 800,000. Therefore, the output tax at 5% of the total amount will be:

AED 800,000 x 5% = AED 40,000

In this case, the final net VAT payable of Company A to the government will be:

VAT = Output Tax – Input Tax

VAT = AED 40,000 – AED 25,000

VAT = AED 15,000

Get Expert Help for VAT Calculation

It is tough to grasp the concept of VAT in one goes because it is a new tax in the UAE. Therefore, make sure to get help in calculating VAT with utmost accuracy to avoid hefty penalties and legal consequences by FTA in UAE.

Do you feel overwhelmed as numbers may confuse you? Let our VAT experts help you with the accuracy of calculations for improved financial management. Contact Us for effective VAT regulations compliance.