How to Calculate VAT in UAE
We recently published the article How to File Vat Return in UAE and hope you found it helpful. Many Vat Consultants in Dubai and across all emirates of UAE are providing Vat Return Submission services. Its not that rocket science, however yet it needs an expert eye and review always. Here, we will follow it up with information on how to calculate the VAT in UAE.
Mathematically, it’s quite simple:
VAT = Output Tax – Input Tax
Now let’s see how Input and Output Tax are calculated:
Input VAT: Amount paid by a buyer as a percentage of 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, Cost Price of the goods/services is = AED 100 knowing the VAT rate is 5%, then Input VAT (VAT paid during buying) will be 100×5%= AED 5.00. Input vat is also called Vat Credit or Recoverable Vat.
Output VAT: Amount received by a seller as a percentage of the selling price of the final product. In context of UAE Vat the rate is 5%. Example, Selling Price of the Product/service is AED 200, then Output Tax (VAT collected during resale) will be 200×5% = AED 10.00. Output vat is also called Vat Collected
VAT Payable: VAT Payable = Output VAT – Input VAT that is AED 10 – AED 5 = AED 5. VAT. It means, Vat is therefore calculated by deducting tax credit from tax collected during the payment period. Payment period is also called Vat period as define by FTA on company Vat Registration Certificate.
How to Calculate VAT, Explained with example:
Company A has purchased raw materials for a total of AED 500,000. Therefore, the input tax will be 5% on total amount will be AED 25,000. Company A sells the goods made up from the raw materials purchased, assume total amount of sales is AED 800,000, the Vat @ 5% will be AED 40,000 called output Vat.
Calculating the final net VAT payable of Company A to the government will be AED 15,000 (AED 40,000 – AED 25,000).
Remember:
- If you are registered for VAT, you are liable to file Vat Return every quarter as defined by FTA for your company.
- You would have paid VAT while purchasing goods from your suppliers. This VAT will not be your cost as you will deduct a corresponding amount while filing the return. We would however urge you to check with your accountant/Vat Consultants in Dubai or whichever emirates you are before attempting to file the Vat Return in UAE.
As mentioned above, mathematically it is quite simple to calculate Vat in UAE, however a deep and thorough Vat knowledge is required to treat each and every business transaction. It’s not that simple as it is taken. Most of the business take the decision to handle the Vat by themselves thinking Vat is just deducting Input Vat from Output Vat. It is worth mentioning here that such businesses are carrying a huge risk with every passing Vat period. Under UAE VAT law, there are various kind of penalties, starting from making a wrong invoice to filing a wrong Vat Return to FTA. Please refer this article for Vat Penalties in UAE.
What does it mean when we mentioned it is not that simple. Following are the key areas which businesses and consultants should keep in mind while treating a business transaction from Vat prospective.
- Import of products and services from outside the UAE and Reverse Charge Mechanism (RCM).
- Online purchase of services like Google, LinkedIn and Facebook etc.
- Transactions from DZ (Designated Free Zone) in case your business is in mainland or in Free Zone.
- Transactions from DZ to DZ in case your business is registered in DZ, what is treatment of Vat on products and services sales.
- Transactions from DZ to mainland when Incoterms are Ex-works or DDP or DDU etc.
- Selling to local companies in UAE while delivery of good are outside UAE.
- Expenses reimbursement for costs incurred on behalf of clients.
- Labor accommodation, when it serviced and when it is non-serviced.
- Services rendered in UAE while invoicing outside UAE or services rendered outside UAE while invoicing inside UAE.
- Inter company transactions when each company is registered separately with FTA, similarly when group companies have group TRN.
- Central management Fee allocation to sister concerns.
- Central IT, Finance and other resource cost allocation to sister concern.
There are many other aspects and varying nature Vat scenarios, depending upon business nature and operating model, which needs intervention of a Vat Expert who can work with you as partner in post the Vat journey in UAE. It not only ensures accuracy of Vat treatment of business transaction, Vat calculations and Vat Return filing but also moves the organization towards robust compliance and governance.
Apart from above, we would also highly recommend business owners or decision makers to consider following key points:
- Start maintaining your financial records in orderly manner;
- Businesses will now need to develop more efficient processes;
- Cost cutting on all fronts that you feel are unnecessary;
- Restructure your business to incorporate new talent who are able to multi task;
- Incorporate a robust accounting system that has VAT module;
- Get professional help for right ways to implement systems;
- Hire professional CA firms who could do the groundwork or leg work for your business for implementation;
- Assess capability of existing systems;
- Identify VAT implementation strategy;
- Identify contracts that need a VAT action;
- Identify inter-company transactions;
- Undertake training / awareness.
Conclusion:
Vat calculation is very simple that is deduct the input vat paid on purchases from output vat collected on sales however the treatment of business transactions with respect to vat create various scenario which needs in depth knowledge and Vat expertise. The recommendation, we made, in this article is to take the Vat subject on top of your cards and seek support from Vat Consultants in Dubai or in your emirates to take you through vat journey in UAE.
For any question or clarification, please contact:
Mian Ehsan
+971 50 625 6414
info@bensauditors.com