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VAT, or Value Added Tax, is a consumption tax applied to goods and services at each production stage, as outlined in the VAT Law or Federal Decree-Law No. 8 of 2017. Since its introduction in January 2018, all businesses in the UAE must register for VAT to avoid substantial penalties from the FTA. As it is crucial for every business to know how to calculate VAT, this blog post will guide you through the steps to calculate VAT in UAE.
What is VAT?
Value Added Tax (VAT) is a consumption tax levied on the value added to goods and services at each stage of production or distribution. Unlike a sales tax that is only charged at the point of sale to the final consumer, VAT is collected incrementally, based on the increase in value of the product or service at each stage of the supply chain.
This means that the tax is applied to the gross margin at each manufacturing, distribution, and sales point. The end consumer ultimately bears it, while businesses act as intermediaries collecting and remitting the tax to the government.
How Does VAT Work in the UAE?
In the UAE, VAT was introduced on January 1, 2018, under the VAT Law or Federal Decree-Law No. 8 of 2017. The Federal Tax Authority (FTA) oversees the administration, collection, and enforcement of VAT in the UAE. The standard VAT rate is 5%, which applies to most goods and services. The UAE VAT operates on the principle of input and output tax:
Input VAT: This is the VAT a business pays on its purchases and expenses. Businesses can generally reclaim input tax if they are registered for VAT, reducing their overall tax burden.
Output VAT: This is the VAT a business charges on its sales of goods and services. It must be collected from customers and remitted to the FTA.
The difference between the VAT collected on sales (output VAT) and the VAT paid on purchases (input VAT) is what the business owes to the FTA or can reclaim. For example, if a business collects more VAT from its sales than it has paid on its purchases, it must pay the difference to the FTA. On the other hand, if it has paid more VAT on its purchases than it has collected from sales, it can reclaim the difference from the FTA.
Difference Between Output VAT and Input VAT
Output VAT and Input VAT are fundamental concepts in the VAT system:
Output VAT: This is the tax a business adds to the price of its goods or services when selling to customers. It represents the amount the business collects on behalf of the government. For instance, if a business sells a product for AED 100 and the VAT rate is 5%, the business will charge AED 105, including AED 5 as output VAT.
Input VAT: This is the tax a business pays on goods and services it purchases for its operations. It can be reclaimed from the government, effectively reducing the cost of these goods and services. For example, if a business buys raw materials worth AED 200 and the VAT rate is 5%, it pays AED 210, including AED 10 as input VAT. This AED 10 can be reclaimed, assuming the purchase is used to make taxable supplies.
The net VAT payable to the FTA is the difference between the output VAT collected from customers and the input VAT paid to suppliers. This ensures that the tax burden is on the final consumer rather than on the businesses themselves.
VAT Rate in the UAE
The standard VAT rate in the UAE is 5%. This rate applies to most goods and services, making it one of the lower VAT rates globally. However, certain goods and services are exempt from VAT or are zero-rated, meaning no VAT is charged, but businesses can still reclaim input VAT incurred.
Zero-rated items include specific exports, international transportation, healthcare, and education services. Exemptions apply to financial services, residential properties, and bare land, among others.
How To Calculate 5% VAT in UAE?
Calculating VAT in the UAE is a straightforward process that requires the following steps:
Determine the VAT-exclusive price: This is the price of the good or service before VAT is added.
Apply the VAT rate: Multiply the VAT-exclusive price by 0.05 (which represents 5%).
Calculate the total price: Add the VAT amount to the VAT-exclusive price to get the VAT-inclusive price.
Here’s the VAT calculation formula that you can use:
VAT Amount = VAT-exclusive price × VAT rate
VAT-Inclusive Price = VAT-exclusive price+VAT amount
For example, if a product’s VAT-exclusive price is AED 200:
VAT amount: AED 200 x 0.05 = AED 10
VAT-inclusive price: AED 200 + AED 10 = AED 210
Alternatively, if you have the VAT-inclusive price and want to find the VAT-exclusive price and the VAT amount, you can use the following formulas:
VAT-exclusive price: VAT-inclusive price / 1.05
VAT amount: VAT-inclusive price – VAT-exclusive price
For example, if the VAT-inclusive price is AED 210:
VAT-exclusive price: AED 210 / 1.05 = AED 200
VAT amount: AED 210 – AED 200 = AED 10
Understanding these VAT calculation helps businesses ensure accurate VAT reporting and compliance with FTA regulations. Alternatively, if this appears complex for you, you can use an online VAT calculator to simplify the process of calculating your VAT.
Online VAT Calculators for the UAE
Here are three online VAT calculators that can be used for your VAT calculations in the UAE:
1. Zoho VAT Calculator
Website: Zoho VAT Calculator
This calculator allows you to quickly calculate the VAT payment for both VAT-inclusive and VAT-exclusive amounts, making it useful for businesses and individuals.
2. ClearTax VAT Calculator
Website: ClearTax VAT Calculator
This tool is straightforward and user-friendly, allowing you to compute VAT for various transactions.
3. UAE VAT Calculator by Tally Solutions
Website: Tally Solutions VAT Calculator
Tally Solutions offers a detailed VAT calculator that can be used to determine the VAT on sales and purchases, facilitating accurate tax computations.
These online calculators simplify the process of computing VAT, ensuring accuracy and compliance with UAE tax regulations.
Expert Guidance on VAT in the UAE
Tulpar Global Finance offers expert guidance on VAT in the UAE, ensuring smooth VAT registration and compliance. Our team helps businesses meet VAT registration criteria by assessing eligibility and preparing necessary documentation.
Our VAT services include VAT registration, VAT refund submission, accurate VAT calculation and filing of VAT returns, and VAT consultancy. By leveraging our expertise, we can help you pay VAT to avoid penalties, ensure compliance, and focus on core operations. Our comprehensive support simplifies the complex VAT processes, providing peace of mind and efficiency.
