In the previous article, we discussed the Profit Margin Scheme and the specific supplies that you are permitted to manufacture under the Profit Margin Scheme. This article explains how to calculate your profit margin and the taxes you pay based on your profit margin program.
How is profit margin calculated?
Profit margin is the difference between the purchase price of the product and the product sale price.
How to calculate the VAT payable under the profit margin scheme.
Profit rate is assumed to include tax. Therefore, the amount of tax to be paid must be calculated backwards from the amount of profit margin.
This can be done using the following formula:
Tax amount = Price including tax * Tax rate ÷ (100 + tax rate)
Now let’s understand the profit margin and tax calculations in some scenarios.
Scenario: You purchase a product from an unregistered person.
Example: Ahmed Used Cars, a VAT-registered used goods dealer, purchases a used car from his consumer, Mr. Juman. The purchase price is AED 10,000. After making the necessary repairs and refurbishments, Ahmed Used Cars hands over the car to another consumer, Mr. Rohan, for Dh15,000.
Understand the calculation of the tax payable if Ahmed Used Cars chooses the margin scheme for this supply.
Now the profit margin of Ahmed Used Cars with the offer is:
AED 15,000 – AED 10,000 = AED 5,000 (sale price – purchase price).
Profit rate includes tax. Therefore, the tax payable can be calculated as follows: Price including tax = 5,000 AED
Tax rate = 5D
44Therefore, tax amount = 5,000 * 5 / (100 + 5) = 238 AED.
For second-hand goods – For sellers of second-hand goods, the profit margin system is a good system for paying tax on the supply of second-hand goods. The advantage of margin regulation is that dealers only have to pay tax on the margin they earn on the sale. This makes a lot of sense for retailers who primarily buy second-hand goods from end customers. Input tax refunds are not possible on these purchases, so these dealers only have to pay tax on the margins they earn on sales. However, traders opting for this regime must ensure that input tax will not be refunded when purchasing these products.
You can also register for VAT Registration on our website: