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vat calculation in uae

What is Taxable Income in UAE? How to do VAT Calculation in UAE?

VAT registration has been rampant for the past months because many businesses have been registering now for the value-added tax (VAT) since the Federal Tax Authority (FTA) has launched the registration for VAT and Excise Tax on their website. VAT in UAE will change the history of the United Arab Emirates (UAE) once it is implemented this coming 1 January 2018. VAT is a consumption tax that will be applied, at each stage, to all the goods and services that are mandated in the VAT Law or the Federal Decree-Law No. 8 of 2017. VAT is applied to the value that is added during the production process.

Since the VAT-registered businesses have the responsibility of having the proper and precise documentation for the VAT-related affairs, it should be noted how VAT calculation is done. The failure to do the provisions stipulated in the landmark Federal Decree-Law No. 7 of 2017 or Tax Procedures Law, Federal Decree-Law No. 7 of 2017 or Excise Tax Law, and Federal Decree-Law No. 8 of 2017 or VAT Law, will face heavy penalties.

Formula to Calculate VAT

The rate of VAT in UAE will be 5%, which is considered to be one of the lowest rates in the world. Since the government will not directly collect the VAT, the companies are going to charge them to the customers.

The formula for calculating VAT is as follows:

VAT = Output Tax − Input Tax

Output Tax

Output tax is simply the VAT collected on selling goods or providing services to clients.

Input Tax

Input tax is the VAT that is paid on purchasing raw materials for the aforementioned goods or services.

How to Collect VAT as a Businessman?

All traders who are involved in the chain of production, which includes the supply of materials for production or the production process itself, should do the following:
• Collect the VAT on the sales, which is output tax
• Recover the amount of VAT that is paid on the purchase of goods, which is the input tax

Subtracting input tax from output tax will have the amount that will be paid to the government. There are situations wherein businesses can forward a request to the government for a refund of VAT although not everyone is allowed to do that. In this case, the businesses will act as the government’s tax collectors.

How to Calculate and Collect Value Added Tax (VAT)? (Explained with example)

To further understand the VAT calculation, below is an illustration that might help in grasping the idea more:

Company A has purchased raw materials for a total of AED 500,000. Therefore, the input tax will be 5% of the total amount, which then will be AED 25,000. After Company A sells the goods (made up from the raw materials purchased), the total amount of sales is AED 800,000. With the same tax rate (5%), the output tax will then be AED 40,000.

In this case, the final net VAT payable of Company A to the government will be AED 15,000 (AED 40,000 – AED 25,000).

Preparation and Registration as a VAT Collector

It is never an easy task to grasp the concept of VAT in one go. This is the reason why we are offering a free assessment if you are in need of any help in regards to VAT registration and calculation in UAE. We, FAR – Farhat Office & Co., are one of the leading VAT consultants in UAE today; hence, we are extending our hand to aid you in whatever you may be having difficulties in with regard to VAT.

Ervee is a CPA with international experience in Tax and Accounting. He has over 12 years of experience in accounting and bookkeeping and over a year in VAT implementation, registration, and accounting in UAE. He regularly drives out inefficiencies in company operations and loves the challenge of helping clients find additional ways for an easier and improved compliance and verification of transactions. Read more