How to Calculate VAT in Dubai

Value added tax will soon find a place in the tax mechanism of the United Arab Emirates. Businesses in UAE are getting prepared for VAT compliances. The companies are searching for all the aspects of VAT like registration, returns, payments, and procedures. Amidst all the speculations and preparations, it is also important to know how to calculate VAT in Dubai. Since it will be the first phase in 2018, the value added tax will be charged at a uniform rate. At a later stage, the government may improvise the rates. An appropriate calculation and application of VAT on the transactions is essential. We have shown here how the VAT calculation is done while making purchases and sales.

The companies registered under VAT will be responsible for proper documentation of their revenue and VAT charges paid by them. The registered firms will be charging this tax at the rate of 5% of the invoice value to all their customers. The firms will also be incurring the VAT of 5% on the goods and services they are buying from the dealers. The difference between the VAT charged and the VAT paid will be either reclaimed or paid to the tax authorities in UAE. This is the reason why it is significant to know the calculation of VAT in Dubai.

Value Added Tax Calculation in Dubai

The rate of the VAT in Dubai will be 5%. This tax will be calculated on the value of the transaction. Generally, it is charged on the net value (Sales less Sales return, Transportation, Freight charges of the transaction). The government will not be collecting the VAT directly. The traders or companies will charge the VAT to all their customers. On the other hand, they will be paying the VAT on the purchase of the goods and services from their suppliers. The difference between the VAT recovered on the sale of the goods and the VAT paid on the purchase of the goods will be paid to the government. VAT = Output Tax (VAT collected on sales/services) – Input Tax (VAT paid on purchases or raw material purchased)

Example on how to calculate VAT:

Suppose X Ltd owns a café shop and spends AED 100000 towards obtaining raw materials. Input tax is 5%, so input tax becomes 5% of AED 100000 = AED 5,000

Now after selling the food by using the purchased raw materials, X Ltd made sales of say, AED 200,000. Supposing 5% output tax, output tax becomes AED 10,000

So, final (net) VAT payable by X Ltd will be AED 5,000= AED 10,000 – AED 5,000.

How VAT will be Collected

The value added tax is charged at each stage of the supply chain and ultimately the final consumer incurs it. The companies themselves act as a tax collector in place of the government. The net result of the differences of the VAT paid and VAT collected is at the end paid to or reclaimed from the government.

This is why the value added tax is also known as indirect consumption tax. Since it is an indirect tax, it is essential to keep the records of each transaction where VAT is paid. The appropriate accounting of the tax paid and tax charged is vital for the businesses.

Maintenance of Records

Businesses will be required to keep records which will enable the authorities to identify the details of the business activities and review transactions. The specifics regarding the documents which will be required and the time period for keeping them will be communicated in due course.