How does VAT work?
Output VAT is the value added tax that you calculate and charge on your own sales of goods and services if you are registered for VAT. Output VAT must be charged on sales both to other businesses and to ordinary consumers. Input VAT is the value added tax added to the price you pay for eligible goods or services. If you are registered for VAT, you can deduct the amount of VAT paid from your settlement with the tax authorities.
VAT registered businesses charge and add VAT to the value of goods and services they supply. They can also reclaim VAT incurred on goods and services. Please refer to the illustration for an easy-to-understand example.
|Coffee Beans Manufacturer||10.50 AED||0.50 AED||0||0.50 AED|
|Beans Distributor||15.00 AED||0.75 AED||0.5 AED||0.25 AED|
|Coffee Shop||20.00 AED||1.00 AED||0.75 AED||0.25 AED|
|Total VAT paid by end consumer*||1.00 AED|
*VAT is collected through the supply chain, and the end consumer pays and bears the VAT cost.
The manufacturer sells the raw beans and charges 5% (0.50 AED) on the sale price as output tax (VAT) to the distributor. As the manufacturer has not incurred any input tax on his purchases, he has a net VAT payable to the tax authority of 0.50 AED (0.50 AED output VAT – 0 AED input VAT = 0.50 AED payable).
The distributor has incurred input tax of 0.50 AED on his purchase from the manufacturer, and charges 5% (0.75 AED) on his selling price as output tax to the coffee shop. The distributor therefore has a net VAT payable of 0.25 AED (0.75 AED output tax – 0.50 AED input tax = 0.25 AED payable to the tax authorities).
The coffee shop has incurred input tax of 0.75 AED on its purchase from the distributor, and charges 5% (1.00 AED) on its selling price as output tax to the final consumer. The coffee shop therefore has net VAT payable of 0.25 AED (1.00 AED output VAT – 0.75 AED input VAT = 0.25 AED payable to the tax authorities).
The final consumer bears the full burden of the tax paid to the tax authorities, 1.00 AED.
For imports, VAT is charged at the first point of entry into the consumer’s country or state (where customs duty may also apply).