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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 NoEventSale price (AED)
1Producer sells raw materials to Manufacturer100
2Manufacturer sells his finished product to Distributor250
3Distributor sells it to Wholesaler350
4Wholesaler sells it to Retailer450
5Retailer sells the product to the customer750

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 NoSellerSale price before vat (AED)Vat@5% (AED)Sale price after vat (AED)
1Producer of Raw materials100.0005.00105.00
2Manufacturer250.0012.50262.50
3Distributor350.0017.50367.50
4Wholesaler450.0022.50472.50
5Retailer750.0037.50787.50

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

Event NoSellerPurchase price (AED)Sale Price (AED)VAT Added (AED)
1Producer of Raw materials0100100
2Manufacturer100250150
3Distributor250350100
4Wholesaler350450100
5Retailer450750300

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

Event NoSellerVAT paid (AED)VAT collected (AED)VAT NET Liability (AED)
1Producer of Raw materials 00.0005.0005.00
2Manufacturer05.0012.5007.50
3Distributor12.5017.5005.00
4Wholesaler17.50 22.5005.00
5Retailer22.5037.5015.00

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 NoSellerValue Added (AED)VAT Net Liability (AED)
1Producer of Raw materials   10005.00
2Manufacturer15007.50
3Distributor10005.00
4Wholesaler100 05.00
5Retailer30015.00

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 NoSellerVAT Net Liability (AED)
1Producer of Raw materials100
2Manufacturer250
3Distributor350
4Wholesaler450
5Retailer750

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.