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 used in nearly 150 countries. This includes 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 gives the United Arab Emirates a new way to make money, which helps the nation in providing high-quality public services. It also assists the government's progress toward its goal of becoming less dependent on oil as well as other petroleum products as a source of revenue.

How to Calculate VAT in UAE?

Businesses registered for VAT must keep good 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. On top of that, the firms pay 5% VAT on the goods and services they buy from dealers. In the UAE, the difference between how much VAT was charged and how much was paid is either refunded or given to the tax authorities. This is why knowing how to figure out the VAT in Dubai is important.

Businesses that are registered for VAT must pay VAT, but that doesn't mean that everyone has to contribute the full amount of VAT accumulated on sales. Here is the formula for measuring 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, on the other hand, is the VAT paid on buying raw materials.

Here, all you have to do is figure out how much output VAT you gathered during the taxable period and how much input VAT you can get back. Once you've figured out the VAT on what you sold and what you bought, you can use the above formula.

If the VAT you pay out is greater than the VAT you pay in, the difference is the VAT you have to pay. If the VAT paid out is lesser than the VAT paid in, the difference will be refunded, and there will be no VAT 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%, so it is 5% of AED 100,000, which is AED 5,000. Now, ABC Ltd sells the food made from the raw materials it bought and generated revenue of AED 200,000 out of sales. The 5% output tax means that the output tax is AED 10,000. So, ABC Ltd's final (net) VAT payment will be AED 10,000 minus AED 5,000, which equals AED 5,000.

Items	Amount	5% Tax amount
Purchase of raw materials	AED 100,000	AED 5,000
Sales	AED 200,000	AED 10,000
	ABC Ltd VAT
Net VAT payment	AED 10,000 - AED 5,000 =	AED 5,000

Collection of VAT

At each step of the supply chain, the value-added tax is added, and in the end, it is paid by the consumer. Instead of the government collecting taxes, the companies do it themselves. The difference between how much VAT was paid and how much was collected is paid to or taken back from the government.

The value-added tax is also called an indirect consumption tax because of this. Since VAT is an indirect tax, you must keep track of every transaction where it is paid. Businesses need to keep good records of the taxes they pay and the taxes they charge. They have to keep records, which lets the government know what the business is doing and look over transactions.

How to Register for VAT in UAE?

The UAE government has chosen three slabs based on how much money is made each year. These are the three slabs mentioned below.

Businesses that make more than AED 375,000 per year must register for VAT.
The registration is optional for businesses that make between AED 187,500 and AED 375,000 a year.
Businesses that make just under AED 187,500 a year do not have to register for VAT.

Following are the simple steps that you can follow to register for VAT in UAE:

All you need to do is go to the FTA's website and sign up for an e-Services account for activation.
Access the dashboard for your e-Services account.
Click "Add New Taxable Person" and sign up for VAT easily through a simple process.

Use Wafeq to create and send VAT-compliant invoices to your customers in a few simple steps.