UAE VAT Calculation

What is VAT?

It is a form of tax that is charged on the domestic consumption of goods and services except for that   are zero rated such as food, medicines etc and on the goods and services that are classified as “Exempted” broadly on exports. The tax is levied at every stage from procurement of raw material, production and till distribution chain that is up to sales. The amount of VAT the user pays is on the cost of the product, less the tax that has already been paid during the production cycle. This form of taxation (VAT) ensures there is no double taxation of the same product or services.UAE Vat calculation is discussed below in detail.

Impact Of VAT in UAE:

VAT will come in effect to all business transactions from January 1^st 2018.It will be a positive reaction for UAE as it will generate revenues for development of infrastructure and economic growth of the country. It is estimated that with the introduction of the new form of taxation “Value Added Tax” the economy may raise its annual revenues by Dh 12 billion in the first year of implementation of the VAT system. Gulf Cooperation Council (GCC) decided upon the implementation of VAT system as being one of the steps to diversify revenues due to the fall in oil prices. Tax reform was top priority in UAE succumb to the fall in oil prices and revenues. This fall in oil prices also affected real estate industry impacting the economic growth of the country.

Rate Of Taxation

Standard VAT rate of 5% will apply to goods and services unless specifically declared as zero rated or exempted.

Sectors specified below will be decided by each member state to be declared as either zero rated or exempt from VAT in their local laws;

• Education;
• Healthcare;
• Real Estate;
• Local Transport.

VAT treatment for following special sectors will be decided individually by each member state and in case not specified otherwise, standard rate will apply;

-Food products falling under the unified list (e.g. basic foods: bread, milk etc.) can be declared zero rated by the member states. -Medical supplies (equipment and medicines) will attract zero rate at the discretion of each member state. -Oil and gas sector including oil derivatives can be declared zero rated by individual member states under conditions laid thereon. -Transport of goods and passengers (intra-GCC and internationally) will be subject to zero rate of VAT. -Export of goods to jurisdictions outside GCC will be zero rated. -Financial services’ VAT treatment is left at the discretion of each member state. Revenue from financial services (margin based income e.g. interest and premium etc.) will be declared exempt from VAT as a general rule, however this exemption may not apply to fee based services offered by the financial institutions as defined in the local laws of the member states. -Free zones’ VAT treatment will be subject to respective laws of member states as they have right to choose their own VAT treatment.

How should businesses prepare for VAT implementation?

• Start maintaining your financial records in orderly manner;
• Businesses will now need to develop more efficient processes;
• Cost cutting on all fronts that you feel are unnecessary;
• Restructure your business to incorporate new talent who are able to multi task;
• Incorporate a robust accounting system that has VAT module;
• Get professional help for right ways to implement systems;
• Hire professional CA firms who could do the groundwork or leg work for your business for implementation;
• Assess capability of existing systems;
• Identify VAT implementation strategy;
• Identify contracts that need a VAT action;
• Identify inter-company transactions;
• Undertake training / awareness.

Procedure to file VAT Returns in UAE:

With the inception VAT form of taxation returns should be filed every quarter that is at a period of every three months. In some cases monthly. The registered entities can file the returns using online services of the Federal Tax portal. Timely submission of the e-returns keeps the company away from being black listed and also helps for expansion of business. A registered company should file returns even if the tax paid by them is NIL.As the returns should be filed every three months record keeping should be prompt and accurate. The e-services section of the Federal tax portal provides online assistance for filing VAT returns. The website available for registration www.tax.gov.ae

Any business which exceeds mandatory or voluntary registration thresholds may be required or may be able to register for VAT

The definition of business embraces most forms of activity and includes any activity conducted regularly or on an ongoing basis, e.g. industrial, commercial, professional, trade, etc

Mandatory Registration

A business must register if:

• The total value of their taxable suppliesmade within the UAE exceeds the mandatory registration threshold over the previous 12 month period, or
• They anticipate making taxable supplieswith a value exceeding the mandatory registration threshold in the next 30 days.
• The mandatory registration threshold will be AED 375,000.

Voluntary Registration

A business may apply to register if they do not meet the mandatory registration criteria and:

• The total value of their taxable suppliesor taxable expenditure in the previous 12 months exceeds the voluntary registration threshold, or
• They anticipate that the total value of their taxable suppliesor taxable expenditure will exceed the voluntary registration threshold in the next 30 days.
• The voluntary registration threshold will be AED 187,500.

Taxable supply definition:

For the purposes of understanding whether a registration obligation exists, a taxable supply refers to a supply of goods or services made by a business in the UAE that may be taxed at a rate of either 5% or 0%. Imports are also taken into consideration for this purpose, if a supply of such goods or services would be taxable if made within the UAE.

Details required for registration:

• Description of business activity
• Last 12 months turnover figure
• Projected future turnover figures
• Expected Import and export values
• Whether company is interested in dealing with GCC suppliers or customers.
• Details of custom authority registration.
• Trade License
• Emirates ID Authorized signatory can be a person who has the power of Attorney to sign on behalf of the business.
• Certificate of Incorporation
• Articles of  Association
• Bank Details.

Upon Successful registration TRN Tax Registration Number will be issued within 20 days .

Importance of VAT returns:

It is mandatory to file returns as government has to generate revenues for country’s betterment. It also has a check on the black money as returns are filed every quarterly. The possibility of money laundering is handicapped by periodical checks.

No manual returns are accepted on the desk. It is mandatory that all the companies registering under VAT should go through online process of registration. This is basically adopted to avoid any kind of manual manipulations. Delay by any tax payee in filing tax return will be penalized by the tax authority.

VAT Return Due Date

The last date to file VAT returns will be the 28th of the subsequent month following the end of the tax period. For quarterly VAT returns, due date will be 28th of the subsequent month following the end of the quarter. The last date to file VAT return for the year 2018 is given below:

For the monthly return, the last date to file VAT return will be 28th of the subsequent month. For example, for the return period of January 2018, the last date will be 28th February, 2018.

Upon registration on the VAT portal, each taxpayer will be given a unique TRN and password for their online account on the website. These details are to be used to file returns online. Follow the steps below.

1. Visit the online portal of the Federal Tax Authority at tax.gov.ae 2. Click the return filing option under the e-services section of the portal 3. Log in using your TRN and password 4. Fill in the VAT return form with the details of your business, transactions, tax liability, penalties (if any), etc. 5. Upload the required documents, bills, etc. 6. Verify the details filled by you and submit the form.

Calculation of VAT

Understanding key words in the calculation of VAT:

Input Tax:

In simple terms ,it means tax paid on raw material for the purpose of making the finished goods. You can reduce the tax that  has been already paid on the inputs and pay the balance taxable amount. Thus, entire taxes paid are set off against the output tax liability and there is no cascading impact of taxes.

Example:

Mr.X ‘s company is a manufacturer of mango juice.Raw materials required are mangoes, sugar, acidity regulators and packaging materials.

Once the final product is made let the tax on output be AED500

Tax to be paid by the manufacturer =AED500 – AED275=AED225

                                  Input Credit=AED275

Input Credit in VAT:A company can avail input tax credit only if it is registered  with Federal Law.

This applies to manufacturer, supplier, agent, e-commerce operator, aggregator or any of the persons mentioned who are registered. You are eligible to claim INPUT CREDIT for tax paid by you on your PURCHASES.

Claim of Input Tax Credit

A entity can claim input tax credit on furnishing the below mentioned

A tax invoice or debit note issued by the registered dealer.

If the goods have been received in the lots or installment, credit will be available for the lst installment on producing the appropriate tax invoice

Possession of Goods and Services

The tax charged on your purchases has been deposited/paid to the government by the supplier in cash or via claiming input credit

Supplier has filed VAT returns

Therefore every input tax credit claimed is matched and validated before the reimbursement.

Exceptions on Input Credit

• It is possible to have unclaimed input credit. Being tax on purchases higher than tax on sale. In such a case, you are allowed to carry forward or claim a refund.

If tax on inputs is greater than  tax on output –> carry forward input tax or claim refund

If tax on output is greater than tax on inputs –> pay balance

No interest is paid on input tax balance by the government

• Input tax can be claimed on taxable and zero rated supplies.
• You must be registered as a taxable person under VAT
• If the entity of registered taxable person changes due to sale, merger or transfer of business, then unused ITC shall be transferred to the sold, merged or transferred business
• Since VAT is charged on both goods and services, input credit can be availed on both goods and services (except those which are on the exempted/negative list).
• Input tax credit is allowed on capital goods.

Non Availability of Input Tax Credit for the following cases

• Input tax is not allowed for goods and services for personal use.
• No input tax credit shall be allowed after VAT return has been filed following the end of the financial year to which such invoice pertains or filing of relevant annual return, whichever is earlier.
• Input tax credit cannot be taken on purchase invoices which are more than one year old. Period is calculated from the date of the tax invoice.
• If depreciation has been claimed on the cost of capital goods, then they are not eligible for Input Tax credit.

Computation Of Value Added Tax:

VAT is charged at 5% on total value of the final goods. As vat is collected at every channel of production and distribution Government will not collect the tax upfront on the final good only. The difference amount resulting from VAT recovered on sale of final good and VAT paid at the procurement of raw material is the Taxable amount that is paid to the government.

Understanding with the formula:

VAT=Output TAX – Input Tax

Output tax: VAT collected on sales of goods and services.

Input Tax: Tax paid on purchase of raw materials. 

Understanding Calculation Of VAT with a scenario:

Mr. Y  a has a textile industry, with annual turnover being more than AED375000.He spends AED 200,000  for procurement of raw materials like yarn, dye etc.

Prevailing VAT rate of 5% is applied on 200,000 which is AED10, 000

Tax on the raw materials is that is Input Tax=AED10, 000

Assuming the finished product is sold for AED 400,000

Output Tax is 5% of AED 400,000 =AED20, 000

Therefore final VAT payable to Government is Output tax – Input Tax

That is AED 20,000 – AED10, 000 = AED 10,000

Best VAT Software for Accountant in UAE

Reach accountant proves to be your best companion to resolve and   tackle all business issue pertaining to financial reports, auditing ,reformation of business structure in lines with new taxation regime.

Beneficiaries Of Reach Software:

Ideal for:

• ü Chartered Accountant
• ü Tax Consultant
• ü Outsourced Bookkeepers
• ü Business Consultants

Need to upgrade to Reach VAT Accountant Software :

Reach Accountant software is well designed to match all the needs for successful running of the business. The software can be used in different industries ,traders ,manufacturers, retailers,  workshop ,business projects etc. It is an accounting software that can automatically manage your book of accounts, taxes, inventory, sales, purchases and more online quickly and securely

Top Features of the VAT Accounting Software are:

Accounting Management: All functions relating to accounts are inbuilt with the software. You can manage your Accounting Ledgers, Bank & Cash Operations, Purchase & Sales Estimates, Warehouse Allocations, Expense Recording, Expense Grouping, Payments – Part or Full, Journal Entries, Income and loss a/c, Balance sheets, Receipts – Part or Full, Contra Entries, Financial Reports, Day book.

Tax Management: Our accounting Software automatically calculates the taxes relevant for every bill created. The Software is designed as per the government norms for calculation of VAT. It also has the option to add any number of taxes relevant to the business. In case of change in tax percentages a change it in the software on your own. All you have to do is add your tax percentage and our software will calculate the taxes automatically. This multiple tax scheme can also be applied to multiple products on a single purchase.

Income Management: The Company can create Quotations then the same can be converted as a Sales order or Pro-forma invoice or Invoice. From Invoice you can create Receipts as well. Accountants will be able to know what payments have been received and what are pending in the reports. You can also set reminders for receiving payments.

Expense Management: You can create Purchase Orders then the same can be converted as bill or payments. You can also create Debit notes for purchase returns. Accountants will be able to know which purchase bills have been paid and which are pending in the reports. You can also set reminders for making payments.

Receipt: Receipts can either be manually entered or imported it in excel format easily.

Payments: Payments can either be manually entered or imported it in excel format easily.

Multi Company: Manage business through comfort of the smart phone.

Tally Import: Tally files can be easily imported to Reach Software of various periods and manage business easily.

Auditor’s Report: Full Financial Report are available,Read process by Auditor,Tax Reports,VAT Report with e-filing options,PF & ESI Reports,Tax Consulting Modules are some features mentioned.

Mobile Application: Access business information through tabs and android smart phones, pick photos of expense vouchers and attach to expenses, daily profitability and other key reports can be viewed on phone.

Bank Synchronization: Bank Statements can be imported in to Reach software through excel files.

Security: There is complete security of data stored in the hard disk. Data can be accessed and control by creating access restriction. One time password   facilities also ensures a check in the log in to the website 

Run Business from anywhere: The business can be run access data from anywhere at your comfort. Just like checking mails from the laptop or systems.

Free and Automatic Upgrades: At Reach Accountant you will be provided free services of upgrading the software frequently with new features and use it absolutely free.

No investment in expensive hardware: The software is browser based. It just requires internet connection which can be connected to multi computers without using LAN and servers.

Automatic Data Backup: Reach stores all the data in servers offsite with regular backups. Hence business information is safe and secure.

Top Two Features of the Reach Accounting Software

Outsourced Accounting: The software enables to finish the outsourced accounts in less than 30 minutes.

Real Time Accounting: Allows client to record sales and purchases online, while finalizing accounts   that is checking the Audit trail, providing MIS reports, checking Tax reports, printing financial reports and filing taxes.