Profit Margin Scheme under VAT in UAE
The Profit Margin Scheme is an important scheme for calculation of VAT in UAE. This scheme is applicable to certain specified goods and there are certain conditions to be fulfilled to be able to supply goods under the Profit Margin Scheme.
The profit margin scheme allows a taxable person to calculate VAT on eligible supplies on the basis of the profit margin earned, instead of the original selling price.
If there is no profit margin for e.g. if the purchase price is more than the selling price, then the value of the supply is zero for VAT purposes.
It is the responsibility of the Tax Registrant to notify the Federal Tax Authority. If Tax Registrant is paying tax under profit margin scheme.
Which goods can be supplied under the Profit Margin Scheme under VAT in UAE?
The profit margin scheme is applicable only to the supply of certain good that are –
Second-hand goods, i.e. tangible moveable property which is suitable for further use as it is, or after repair
Antiques, i.e. goods which are over 50 years old
Collectors’ items, i.e. stamps, coins and currency
Reason behind Why Profit Margin Scheme is Notified by Govt.
When the goods are purchased –
- By registered second-hand goods dealers usually from unregistered consumers, VAT is not levied and hence, no input tax is recoverable by the second-hand goods dealer on the purchase. Hence, when these goods are sold by the second-hand goods dealers, it would not be right for the dealer to have to pay VAT on the full sale value, as it would lead to double taxation on the goods. As a result, for such supplies, a provision to pay VAT only on the profit earned on the supply has been given.
- By a VAT registered person, there can be scenarios where registered second-hand goods dealers purchase used goods from registered persons. In this case, the supplier will levy VAT on the supply –
- If the second-hand goods dealer is opting for the margin scheme for supply of these used goods, the dealer is not eligible to recover this input tax paid.
- If the second-hand goods dealer is not opting for the margin scheme, the dealer is eligible to recover the input tax paid.
Only those goods which have previously been subject to VAT before the supply may be subject to the profit margin scheme. As a result, stock on hand of used goods which were acquired prior to the effective date of Federal Decree-Law No. (8) on Value Added Tax (“VAT law”), or which have not previously been subject to VAT for other reasons, are not eligible to be sold under the profit margin scheme.
VAT is therefore due on the full selling price of such goods.
Conditions for supply of goods under the Profit Margin Scheme
The supply of goods under the Profit Margin Scheme should fulfill either of the following conditions:
The goods must be purchased from either:
- A person who is not registered under VAT or
- A Taxable Person who supplied the goods under the Profit Margin Scheme
Where the input tax on the purchase of such goods was not recovered by a taxable person
Profit Margin Scheme under VAT in UAE Be Applicable To
- Goods which are bought after the implementation of VAT in the UAE i.e. after 1st Jan 2018.
- Those goods for which VAT was charged previously.
- Goods were purchased on or after 2018 from a registered supplier.
If the goods were purchased from a supplier after 1st Jan 2018 and it was known that the supplier purchased those goods after 1st Jan 2018, then Profit Margin Scheme can be applied but there should be valid evidence to prove that the goods were subject to VAT on an earlier supply.
Calculation of VAT to be paid under Profit Margin Scheme
The profit margin will be considered to be inclusive of tax. Hence, the amount of tax to be paid needs to be back-calculated from the amount of profit margin.
For this, the following formula can be used:
Tax amount = Value inclusive of tax * tax rate ÷ (100 + tax rate)
1. Mr. ABC, a person registered under VAT is dealt with within the business of selling antique items. He bought an antique statute from Mr. Z, a non-registrant costing AED 1500. Mr. ABC sold the same antique statute to Ms. R for AED 2000. Calculate the Output VAT and Input VAT to be declared in the VAT return of Mr. ABC.
Purchase Price = AED 1500
Selling Price = AED 2000
Profit margin earned = AED 500
Output VAT = 500/1.05*0.05 = AED 23.81
Input VAT = zero, as Mr. ABC purchased from a non-registrant.
2. A VAT registered second-hand goods dealer, Sejal Used Cars, purchases a used car from a consumer, Mr. Akshay. The purchase price is AED 20,000. After the required repairing and refurbishing, Sejal Used Cars supplies the car to another consumer, Mr. Anil, for AED 25,000.
Let us understand the calculation of tax to be paid by Sejal Used Cars if they opt for the margin scheme for this supply.
Here, the profit margin of Sejal Used Cars on the supply is:
AED 25,000 – AED 20,000 = AED 5,000 (Selling price- purchase price).
The profit margin is inclusive of tax. Hence, the tax to be paid can be calculated as shown below: Value inclusive of tax = AED 5,000
Hence, tax amount= 5,000 * 5 / 1.05 = AED 238.
Tax rate = 5%