How VAT will be charged on production & distribution of goods & services
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VAT on Production & Distribution of Goods & Services in UAE

How VAT Will be Charged on Production & Distribution of Goods & Services in UAE

Value-added tax (VAT) is a tax that is applied to all the goods and services that are produced by the eligible VAT companies and are consumed by the people. That is why it can be said that VAT is a consumption tax. There is a difference between VAT and other sales tax. Although for some people both taxes work in the same way.

However, there is a slight difference between the working of the two. The sales tax is applied only at the last stage of the production of a product. VAT, on the other hand, is applied at each and every stage of the production which is why it is also known as a multi-stage tax. The VAT is applied to the value that is added during the production process.
Every trader, which is involved in the chain of production including the supply of materials for production or the production process itself, should:

  • Collect the value-added tax (VAT) on the sales they are doing. This will be called the output tax.
  • Recover the amount of VAT that is paid on the purchase of goods which will be the input tax.

The traders are eligible to deduct the amount of VAT on the purchase and the sales of goods. The difference between this input or output tax will then be paid to the government. Apart from the payment, the traders can also forward a request for the refund of VAT but this is possible only in certain situations. Not every individual is eligible for this.

The working of VAT is in this form i.e. offsetting on the purchases and then on sales, is required in order to add up the value at every stage of the production and the distribution chain. This is the reason it is known as the value-added tax. At the final stage, the VAT will take part in the purchase price of the goods. It is paid by the customers or the person who is purchasing the goods. The business of the company will then act as a tax collector for the government.

After the completion of the above-mentioned process, the government will collect all the amounts of VAT from the trader that is calculated for every stage of the production and distribution. The equal amount of that money will then be paid to the final consumer.

How does Vat work?

The way in which the VAT will work can be illustrated through the following process of production and distribution:

Event No Event Sale price (AED)
1 Producer sells raw materials to Manufacturer 100
2 Manufacturer sells his finished product to Distributor 250
3 Distributor sells it to Wholesaler 350
4 Wholesaler sells it to Retailer 450
5 Retailer sells the product to the customer 750

As the rate of VAT that is applicable is around 5%, the total price that is to be paid by each seller will be as follows:

Event No Seller Sale price before vat (AED) [email protected]% (AED) Sale price after vat (AED)
1 Producer of Raw materials 100.00 05.00 105.00
2 Manufacturer 250.00 12.50 262.50
3 Distributor 350.00 17.50 367.50
4 Wholesaler 450.00 22.50 472.50
5 Retailer 750.00 37.50 787.50

The value that each seller will add up to the process of production and distribution is explained below:

Event No Seller Purchase price (AED) Sale Price (AED) VAT Added (AED)
1 Producer of Raw materials 0 100 100
2 Manufacturer 100 250 150
3 Distributor 250 350 100
4 Wholesaler 350 450 100
5 Retailer 450 750 300

After that, the amount of VAT that every seller has collected to paid will be shown in the following table:

Event No Seller VAT paid (AED) VAT collected (AED) VAT NET Liability (AED)
1 Producer of Raw materials  00.00 05.00 05.00
2 Manufacturer 05.00 12.50 07.50
3 Distributor 12.50 17.50 05.00
4 Wholesaler 17.50  22.50 05.00
5 Retailer 22.50 37.50 15.00

The value of VAT for each seller is provided to them by the government after filling for the VAT return. All the amount that is collected throughout the process is added together to calculate the liability that is to be paid by the seller. The analysis of the illustration is as follows:

Event No Seller Value Added (AED) VAT Net Liability (AED)
1 Producer of Raw materials    100 05.00
2 Manufacturer 150 07.50
3 Distributor 100 05.00
4 Wholesaler 100  05.00
5 Retailer 300 15.00

Value Added is taken from Table-3 above.

A VAT of Dh37.50 is paid by the customer. However, the VAT paid by the retailer to the government is Dh15. This difference is created because the remaining price is already paid by the seller in different stages of production.

Event No Seller VAT Net Liability (AED)
1 Producer of Raw materials 100
2 Manufacturer 250
3 Distributor 350
4 Wholesaler 450
5 Retailer 750

When the amount of VAT is paid by the retailer, the total value of VAT that is collected by the government for the production of the sold product will be equal to the value of VAT paid by the final customer.

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