Profit Margin Mechanism in Oman VAT

Yarab A | Updated on: February 21, 2022

In Oman, VAT is calculated on the taxable value, i.e., the sale value, and it applies to most of the supplies made in the Sultanate of Oman. However, there is certain nature of goods for which VAT can be calculated on the profit margin instead of the sale value. This is allowed through a special provision known as a profit margin mechanism.

Profit margin mechanism in Oman VAT

The Profit margin mechanism is a scheme that provides businesses with an option to calculate VAT on the profit earned (on a supply of goods) instead of the sale value. This scheme is applicable only for the supply of goods and specifically for used goods, popularly known as second-hand goods.

The VAT regulation in Oman has specified the conditions and the type of used goods that falls within the scope of the profit margin scheme. Businesses will be allowed to opt only when those conditions are met.

Type of used goods covered under the profit margin scheme

Only notified used goods can be supplied under the profit margin scheme, as mentioned below:

• The tangible movable property that is suitable for further use as it is or after repair, provided it has not gone through adjustments or repairs that change its basic character
• Antiques that are more than 50 years old
• Artworks or other items of scientific, historical or archaeological importance
• Collectors' items, i.e., stamps, coins, banknotes, collectors' pieces of zoological, botanical, mineralogical, anatomical, historical etc.

Profit margin scheme conditions

Following are the conditions of the profit margin scheme that businesses must fulfil:

• The activity of buying or selling used goods is within the scope of the taxable person's usual activity
• Obtaining approval from the authority to use the profit margin mechanism to calculate the VAT on the form prepared for such purposes
• The used goods are located in the Sultanate
• Purchase of used goods from any of the following persons:
  
  • Non-taxable person in the Sultanate
  • A taxable person who calculated the VAT on these used goods according to the profit margin mechanism under the authority's approval
  • A taxable person who is not allowed to deduct input tax on these goods according to the provisions of law and regulations

VAT calculation under profit margin scheme

To calculate VAT under the profit margin mechanism, first, you need to determine the profit margin for a given translation. The profit margin is the difference between the selling price of used goods and the purchase price of the used goods.

Once you know the profit margin, it becomes easy to calculate the VAT. It is important to note that the profit margin is considered to be inclusive of VAT. Hence, the amount of tax to be paid needs to be back-calculated from the amount of profit margin. You can easily do this by applying the below formula:

Tax = (Profit Margin X Tax Rate)/ (100% + Tax Rate)

For example, Abdul Enterprises made a profit of 10,000 OMR on selling used goods and opted to pay VAT under the profit margin mechanism. The VAT will be calculated as below

VAT = (10,000 X 5)/ (100+5)

VAT of 476.19 will be payable by Abdul Enterprises

Key points to remember

• Businesses supplying used goods must issue a tax invoice to the customer, including all details as per VAT regulation
• The VAT amount will not be included on the invoice
• The phrase "Tax calculated under the Profit Margin Mechanism" should be mentioned on the invoice
• Businesses who apply for profit margin mechanism are not entitled to any input tax deduction ( on used goods purchases)
• A profit margin 'Self-Invoice' when purchasing used goods from a non-taxable person
• All the tax invoices, accounting records, books and other documents should be retained for a period of 10 years

TallyPrime – A business management software with Oman VAT solution

No matter whether you have opted to pay VAT on the profit margin scheme or the sale value, you can easily manage it using TallyPrime. You can record purchases and sales and automatically calculate the tax liability on the transactions under the profit margin scheme.

Profit margin calculation in TallyPrime

You can generate complaint tax invoices, both in English and Arabic, record different types of supplies, prevent and detect errors, accurate return filing, and much more, making TallyPrime a complete business software.

Read more on Oman VAT:

• Reverse Charge Mechanism in Oman VAT
• Record and Book Keeping Requirement under Oman VAT
• Best VAT Software in Oman