How to calculate VAT in UAE



What is Value Added Tax (VAT)?

Value-added tax (VAT) is a tax on goods and services charged at every point in the supply chain where value is added, from the beginning of production to the point of sale. It is a type of sales tax on taxable products. VAT is essential for a business and can be added to many items.

Introduction of VAT in UAE

VAT is among the most popular types of sales tax used all over the world, and it is implemented in nearly 150 countries, including all 29 countries in the European Union (EU), Canada, New Zealand, Australia, Singapore, and Malaysia.

VAT, or value-added tax, was enforced in the UAE on January 1, 2018, and is charged on all goods and services sold in the UAE. Some products or services are subject to either a 0% rate or an exemption. However, the standard rate applied to most goods is 5%.

This includes non-life insurance and reinsurance. VAT provides the United Arab Emirates with a new way to generate revenue, which helps the nation provide high-quality public services. It also supports the government's progress toward its goal of becoming less dependent on oil and other petroleum products as a source of revenue.

Read Also: VAT in Dubai: Essential Guide to Understanding Value Added Tax for Businesses.

How to Calculate VAT in UAE?

Businesses registered for VAT must maintain proper records of how much money they make and how much VAT they pay.

All customers of registered businesses pay this tax at a rate of 5% of the invoice value. In addition, the businesses pay 5% VAT on the goods and services they buy from dealers. In the UAE, the difference between the VAT collected and the VAT paid is either refunded or given to the tax authorities. This is why understanding how to calculate VAT in Dubai is important.

Businesses registered for VAT must pay VAT, but that doesn't mean they pay the full amount of VAT collected on sales. Here is the formula for calculating the VAT that must be paid to the government:

VAT = Output VAT – Input VAT

Note:

• VAT output is the amount of VAT collected on sales and services.
• VAT input is the VAT paid on purchasing raw materials.

To calculate, simply determine how much output VAT was collected during the taxable period and how much input VAT is recoverable. Subtract the VAT on purchases from the VAT on sales using the formula.

• If the output VAT is greater than the input VAT, the difference is the VAT payable.
• If the input VAT is greater than the output VAT, the difference will be refunded, and no VAT will be due.

Example

Let's say that ABC Ltd runs an eatery and spends AED 100,000 on the purchase of raw materials.

• The input tax is 5%, which amounts to AED 5,000.
• ABC Ltd sells food made from these raw materials, generating AED 200,000 in revenue from sales. The 5% output tax on this is AED 10,000.

The final (net) VAT payment will be calculated as follows:

• Net VAT Payment = Output VAT – Input VAT
• AED 10,000 – AED 5,000 = AED 5,000



Collection of VAT

At each step of the supply chain, VAT is added, and ultimately, it is paid by the consumer. Businesses collect this tax on behalf of the government. The difference between VAT collected and VAT paid is settled with the government.

VAT is also referred to as an indirect consumption tax for this reason. Since VAT is an indirect tax, businesses must keep records of every transaction where VAT is involved. This ensures transparency and allows the government to monitor the business’s financial activities.

Learn more: Understanding Value-Added Tax (VAT): A Comprehensive Guide.

How to Register for VAT in UAE?

The UAE government has set thresholds for VAT registration based on annual revenue:

Businesses earning over AED 375,000 annually must register for VAT.

Businesses earning between AED 187,500 and AED 375,000 annually can register voluntarily.

Businesses earning less than AED 187,500 annually are not required to register.

Steps to Register for VAT:

• Visit the Federal Tax Authority (FTA) website and sign up for an e-Services account.
• Access your e-Services account dashboard.
• Click "Add New Taxable Person" and follow the straightforward steps to complete the VAT registration.