How to Calculate VAT in UAE?

UAE businesses must know the VAT calculation to determine the VAT liability, ensure compliance, and manage the finances effectively. The VAT amount can be calculated by multiplying the total amount of taxable supplies with the VAT rate (5%). It is necessary to understand the concepts of input and output VAT to calculate the payable VAT amount. This article helps you learn about the basic concepts of VAT and how to calculate VAT in UAE, including the payable tax amount, with clear explanations.

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What is VAT?

Value Added Tax (VAT) in the United Arab Emirates (UAE) is a consumption tax charged on goods and services at each stage of the supply chain. Introduced in 2018, VAT is set at a standard rate of 5% on most goods and services, with some exemptions for essential items such as certain food items, healthcare services, and education. VAT plays a significant role in diversifying the UAE's revenue sources and reducing reliance on oil revenues. Businesses registered for VAT must charge VAT on taxable supplies, maintain accurate records of their transactions, and submit regular VAT returns to the Federal Tax Authority (FTA).

How to Calculate VAT amount?

The formula to calculate VAT amount in UAE is given below,

• VAT amount: This is the total amount of VAT you must pay the government.
• Net value of Taxable supplies: This is the total value of your taxable supplies, excluding VAT. It includes the total value of goods and services you have sold, subject to VAT, minus any returns or discounts.
• VAT rate: This is the standard VAT rate in the UAE, which is currently 5%.

Example:

Let's say you run a business that sells clothing, and you had the following sales in a month:

• Total sales of AED 10,000 (including VAT)
• Returns of AED 500

As returns are not subject to VAT, you have to deduct them from your total sales to get the net value of taxable supplies:

Net value of Taxable supplies = Total sales - Returns

• Net value of Taxable supplies = AED 10,000 - AED 500
• Net value of Taxable supplies = AED 9,500

Now, you can use the formula to calculate the VAT amount:

VAT amount = Net value of Taxable supplies * VAT rate

• VAT amount = AED 9,500 * 0.05
• VAT amount = AED 475

Hence, you need to pay 'AED 475' in VAT to the UAE government.

Note: To calculate the gross amount, you can just add the amount with the net value of taxable supplies. It represents the final price the consumer pays for the goods and services.

What are the Input VAT and Output VAT?

Input VAT and Output VAT must be understood to calculate the payable VAT amount.

Input VAT:

Input VAT refers to the VAT a business pays on its purchases or expenses. When a business buys goods or services subject to VAT, it needs to pay VAT. It is called Input VAT. For example, if the business makes a purchase worth AED 1000 with a 5% VAT rate, then the input VAT will be AED 500 (1000*0.05). 

Output VAT:

Output VAT refers to the VAT the business collects from its customers on taxable supplies. When a business sells goods or services that attract VAT, the VAT will be charged on those sales. It is known as Output VAT. For example, if the business sells goods or services total value of AED 20,000 with a 5% VAT rate, then the output VAT will be AED 1000 (20,000*0.05).

Also read: Input tax recovery under VAT in UAE

How to Calculate the VAT payable amount in UAE?

The formulate to calculate the payable VAT amount is given below,

• Payable VAT amount: It refers to the final VAT amount your business needs to pay to the Federal Tax Authority (FTA).
• Output VAT: It refers to the VAT you charge on your sales of goods and services. It is calculated by multiplying the net value of your taxable supplies by the standard VAT rate (currently 5%).
• Input VAT: This represents the VAT you pay on purchases of goods and services used for taxable supplies. It includes VAT incurred on raw materials, equipment, utilities, and other taxable purchases in your business.

Example:

Let's say,

• The net value of your taxable supplies (excluding VAT) was AED 20,000 (calculated by deducting any returns or discounts from your total sales).
• You paid AED 700 in VAT on your purchases (input VAT).

Now, you can use the formula to calculate your payable VAT amount:

Output VAT: AED 20,000 * 0.05 = AED 1000

Payable VAT amount: AED 1000 (output VAT) - AED 700 (input VAT) = AED 300

Hence, your total payable VAT amount to be paid to FTA is AED 300. If the payable VAT amount results in negative, it means you have overpaid your VAT and can claim a refund from the FTA.

Consequences of Not Paying VAT in UAE

Failing to pay Value Added Tax (VAT) in the United Arab Emirates (UAE) can seriously affect businesses. It can lead to penalties, fines, and legal actions by the Federal Tax Authority (FTA). These penalties may include monetary fines or even suspension of business operations. Moreover, non-compliance with VAT regulations can harm a company's reputation and break the trust with customers and partners. Persistent non-payment could ultimately result in the closure of the business or criminal charges for tax evasion. Therefore, businesses in the UAE need to understand and fulfil their VAT obligations to avoid these negative outcomes.

Conclusion

We hope the VAT formulas outlined in this article help you to carry out the required calculations effectively. Understanding how to calculate VAT in the United Arab Emirates (UAE) is important for businesses to manage their finances and ensure compliance with tax regulations. Moreover, comprehending the concepts of input VAT, which is the tax paid on purchases, and output VAT, which is the tax collected from customers, is essential for calculating the payable VAT amount. 

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