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 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 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.
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.