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How to Calculate VAT / TAX in UAE

Below is an illustration that will help in understanding the VAT calculation. Before filing the VAT return, it is necessary to have clarity of calculating the precise amount of Value Added Tax.

Company A has purchased raw materials for a total of AED 200,000. Consequently, the input tax will be 5% of the total amount i.e.

AED 200,000 x 5% = AED 10,000

Now Company A sells the product made up of the raw materials purchased, suppose the total amount of sales is AED 400,000. The output tax at 5% of the entire amount will be:

AED 400,000 x 5% = AED 20,000

Now, the final net VAT payable of Company A to the government will be:

VAT = Output Tax – Input Tax

VAT = AED 10,000 – AED 20,000

VAT = AED 10,000

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Value Added Tax Calculation in UAE

VAT was introduced in the UAE from 1 January 2018. VAT is a form of a consumption tax on the transactions of goods and services, which applies to each stage of the supply chain as mandated under the VAT Law or Federal Decree-Law No. 8 of 2017. Ever since its implementation, all the businesses in the UAE are liable for registering for VAT or will be responsible for paying hefty penalties according to FTA regulations. This is the reason why it is important to know the calculation of VAT in UAE.

How do Businesses Owners Calculate VAT in UAE?

The rate of VAT in the UAE is considered as 5%, which is one of the lowest charges in the world. The government of UAE does not collect the tax directly; instead, the traders or companies are responsible for charging the VAT to their customers. This is the reason that a value-added tax is also called an indirect consumption tax. As it is an indirect tax, it is necessary to maintain the records of every transaction where VAT is paid.

The formula for calculating VAT is as given below:VAT = Output Tax – Input Tax

Output Tax

Output tax is the VAT Collected by a seller as a percentage of the selling price of the final product. Let’s consider the example for better understanding. For example, Selling Price of the product/service is AED 400, and then Output Tax (VAT collected during resale) will be 400x5 %( UAE VAT rate) = AED 20.00.

Input Tax

Input tax is the VAT that is paid on purchasing by a buyer as a percentage of the cost price for goods/services. As per the VAT standard of UAE, the VAT rate is 5% on invoice value (excluding special cases, e.g., profit margin scheme). Here is an example for better understanding. Cost Price of the goods/services is = AED 200, knowing the VAT rate is 5%, then Input VAT (VAT paid during buying) will be 200x5%= AED 10.00. It is also known as VAT Credit or Recoverable VAT.

VAT Payable

All the traders who are involved in the business should collect VAT on sales, which is also called output tax and also recover VAT amount paid on the purchase of goods, called input tax. Deducting the input tax from output tax will give the amount that has to be paid to the government.

Connect with our Experts for Information on VAT Calculation in UAE Online

It is a difficult task to understand the theory of VAT all at once. We are always available to help you out with the understanding and calculations regarding VAT. We offer the utmost accuracy to avoid huge penalties and legal consequences by FTA in UAE. Our VAT experts assist you with the exactness of calculations for enhanced financial management.

We at Peniel believe in collaborating with our valued clients. Our team would be glad to share the most up-to-date updates and best practices with you. VAT registration has been extended for the past months as several businesses have been registering for the value-added tax (VAT) since the Federal Tax Authority (FTA) has instigated the registration for VAT.

We offer Auditing, Accounting and VAT Consultancy Services in Dubai, UAE and all over the Middle East.

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