VAT calculation when price is inclusive of VAT
In business, it is common to issue and receive invoices for goods or services where the price is inclusive of tax. Inclusive of tax means that the price quoted includes the value of tax. Under UAE VAT, in certain scenarios, it is mandatory that the displayed price of goods or services is inclusive of VAT. In such cases, if a taxable person fails to display the prices of goods or services as inclusive of tax, it will lead to an administrative penalty of AED 15,000. At the same time, when a tax invoice is issued for the supply of such goods or services, the amount of VAT needs to be quoted separately. In such cases, let us understand how to calculate the amount of VAT when the price quoted is inclusive of VAT.
When should price be inclusive of VAT?
Every Taxable Person in UAE should display the price of taxable goods or services as inclusive of VAT, except in the following cases:
The supply is for export
Export of goods or services is when goods or services are supplied to a recipient who is located outside UAE. There are various scenarios of export and in each scenario, VAT is chargeable differently. To learn more about the scenarios of export, you can refer our article Exports and imports under VAT . In the scenarios of export where VAT is chargeable, the price of goods or services should not include the amount of VAT.
The customer is a registrant
When the supply of goods or services is to another registrant in UAE, the price of the goods or services supplied should not be inclusive of tax. The VAT amount needs to be displayed separately.
Import of goods or services
When goods or services are imported, a registrant in UAE has to pay VAT on reverse charge on the import. In such cases, the invoice raised by the recipient should display the price without including the value of VAT paid on the import.
Formula to calculate VAT when price is inclusive of VAT
When the price quoted is inclusive of VAT, the VAT amount can be arrived at using the following formula:
Tax amount = Value inclusive of tax X tax rate ÷ (100 + tax rate)
Let us discuss an example to understand this:
Jehan & Co. in Dubai supplies a television to Noor Electronics in Abu Dhabi. The television’s price inclusive of VAT is AED 50,000. Jehan & Co. wants to arrive at the value of tax.
Here, VAT rate applicable on television is 5%.
Let us arrive at the value of VAT in this case:
Value inclusive of tax = AED 50,000
Tax rate = 5
Hence, VAT amount = 50,000*5/105 = AED 2,381
Hence, this simple formula can be used by any person who wants to calculate the value of VAT when the price of goods or services is inclusive of VAT. Note that in a tax invoice under VAT, the VAT amount has to be shown separately in the invoice, even if a product or service is sold at a price which is inclusive of vat.