The introduction of VAT (Value Added Tax) came as a major change in the tax landscape of the United Arab Emirates. This newly implemented scheme aimed at diversifying the revenue sources for the government in order to maintain public service standards. Yet another focus of the UAE VAT system is to lower the country’s dependency on oil and hydrocarbon revenue. Over the course of time, VAT became a fundamental part of its financial framework. Since every VAT-registered business is required to pay VAT, it might be a concern how to calculate VAT in UAE.
This article will take you through different aspects of VAT in the UAE and cover the key details regarding VAT calculation, input and output VAT, and essential rules related to this tax.
What is VAT?
Value Added Tax, also known as consumption tax, is an indirect tax imposed on the sale and import of goods and services. Over 160 countries in the world follow the VAT system. The tax is levied at every stage of the supply chain, from purchasing raw materials by the manufacturer to selling the finished product to the end consumer. The seller of the product collects the tax money from the consumer and remits it to the government.
Let’s learn the functioning of VAT with an example:-
If a manufacturer sells a product to a wholesaler at a price of AED 100 and includes the standard VAT rate of 5% (AED 5), then the total price becomes AED 105, which the wholesaler pays to the manufacturer. The wholesaler further sells the product to a retailer at AED 150, including 5% VAT (AED 7.5), the total amount sums up to AED 157.5 which the retailer has to bear. Finally, the retailer sells the product to a customer at AED 200 adding another 5% VAT (AED 10), making a total of AED 210, which is paid by the buyer.
In this whole scenario, the wholesaler will claim a refund of AED 5 from the VAT paid to the manufacturer, remitting AED 2.5 to the government. Similarly, the retailer will claim a refund of AED 7.5 paid to the wholesaler, remitting AED 2.5 to the government. Thus, the overall cost of the VAT is ultimately borne by the end consumer.
On 1st January 2018, the United Arab Emirates introduced VAT at a standard rate of 5% on all taxable supplies and imports. These supplies are also referred to as ’standard rate supplies.’ However, not all goods are taxed at the standard rate in the UAE. Some are exempt from VAT and taxed at a 0% rate, such as certain educational services, healthcare services, and the export of goods and services outside the GCC (Gulf Cooperation Council).
VAT Registration in the UAE
According to the UAE VAT regulations, businesses with taxable supplies and imports above AED 375,000 in the previous year are mandatorily required to register for VAT. This threshold is to ensure that small businesses are not burdened with the bureaucracies of VAT.
On the other hand, businesses with taxable supplies and imports above AED 187,500 or up to AED 375,000 annually can opt for voluntary VAT registration. Once registered, these enterprises can avail the financial advantage of recovering the VAT they paid on business-related purchases.
Understanding these regulations and keeping up with the laws will ensure compliance with the VAT guidelines, thereby avoiding any penalties that may arise due to non-compliance.
How to calculate VAT in UAE?
There are basically two approaches to VAT calculation in UAE – First, adding VAT to the sale price, and second, excluding the VAT from the sale price.
Adding VAT to the sale price – This approach is used when VAT is not added to the sale price.
VAT amount = Sale price * VAT rate/100
Gross amount = Sale price * (1+VAT rate)/100
Excluding VAT from the sale price – When VAT is included in the sale price, you can use this method.
VAT amount = Sale price * VAT rate/(100+VAT rate)
Net sale amount = Sale price * 100/(100+VAT rate)
Now, let’s understand how to calculate VAT in UAE with an example –
Sale amount = AED 1,000 and VAT rate = 5%
· When the sale price excludes VAT:
VAT amount = AED 1,000 x (5/100) = AED 50
Gross amount = AED 1,000 x (1+ (5/100)) = AED 1,050
· When the sale price includes VAT:
VAT amount = AED 1,000 x (5/(100+5)) = AED 47.62
Net sale amount = AED 1,000 x (100/ (100+5)) = AED 952.38
What is Input VAT and Output VAT?
The system of VAT is largely based on the concept of input VAT and output VAT.
Input VAT – The tax paid on purchases is called input VAT. For example, you purchased goods worth AED 5,000 and paid 5% VAT on it. The tax amount of AED 250 incurred by you is the input VAT.
Output VAT – The tax collected from sales is called output VAT. For example, you sold goods worth 10,000 with 5% VAT on it. The tax amount of AED 500 collected by you is the output VAT.
To calculate net VAT payable, the VAT-registered entities must deduct input VAT from the output VAT. If the output VAT exceeds the input VAT, the difference amount must be remitted to the government. On the contrary, if the output VAT is less than the Input VAT, then the taxpayer can seek a refund for the difference amount.
If you wish to automate VAT calculation in UAE and auto-generate the VAT payable, then connect with the tax advisors of Shuraa tax. They have the best solutions for all your VAT automation requirements and will fully support you in maintaining compliance with the UAE VAT laws.
What are the VAT-related responsibilities for businesses in the UAE?
VAT-registered businesses in the UAE need to be aware of certain responsibilities to ensure compliance with the regulations.
Charging VAT – All businesses eligible for VAT must charge 5% VAT on taxable goods or services meant for supply.
Reclaiming input tax – Businesses can recover the paid VAT by deducting the VAT paid on purchases from the VAT collected on sales. Here’s how you can reclaim VAT:
· Calculate the VAT paid on purchases
· Deduct the amount from the VAT collected on sales
· The difference amount must be remitted to the government
Keeping records – Maintain systematic records for the government to ensure that the company is following the correct process for different VAT purposes. These include:-
· Financial records listing every sale and import of goods and services
· All received tax invoices, credit notes, and relevant documents
· All issued tax invoices, credit notes, and relevant documents
· Details of goods and services used for non-business purposes, including the taxes paid on them
· Details of goods and services purchased on which input tax was not claimed
· Records of goods and services that have been exported
· Evidence of any adjustments or amendments made to accounts or tax invoices
· Documents related to any tax accounting frameworks employed
Conclusion
We hope that the provided information will help you carry out the required calculations effectively. Understanding how to calculate VAT in UAE will help you manage your finances well and ensure compliance with the mandatory tax regulations. Moreover, keeping up with the concept of input VAT and output VAT will simplify your calculations and your business financial processes.
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