In our previous article, we have discussed the Profit Margin Scheme and the specific supplies which are eligible to be supplied under the Profit Margin Scheme. In this article, let us understand the calculation of profit margin and tax to be paid under the Profit Margin Scheme .

How is the Profit Margin calculated?

The profit margin is the difference between the purchase price of the goods and the selling price of the goods.

How to calculate 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)

Let us now understand the calculation of profit margin and tax using some scenarios.

Scenario: buying goods from someone who has never registered

Example: A second-hand dealer Ahmed second-hand car registered for VAT purchases a second-hand car from consumer Mr. Juman. The purchase price is 10,000 dirhams. After necessary repairs and refurbishment, Ahmed used car offered the car to another consumer, Mr. Rohan, at a price of Dh15,000.

Let us understand the amount of tax that should be calculated if Ahmed used car chooses the margin plan for this supply.

Here, Ahmed’s profit margin on the supply of used cars:

15,000 dirhams-10,000 dirhams = 5,000 dirhams (selling price-purchase price).

The profit margin includes tax. Therefore, the tax payable can be calculated as follows: Tax included = Dh5,000

Tax rate = 5%

Therefore, the tax amount = 5,000 * 5 / (100 + 5) = 238 dirhams.

For second-hand commodity traders, the profit margin plan is a good plan to pay the second-hand commodity supply tax. The advantage of choosing a margin plan is that traders only need to pay taxes on the margin of sales. This is very useful for dealers who mainly buy second-hand goods from end customers. Since there are no regulations applicable to the recovery of input tax on these purchases, these dealers are only required to pay taxes on the security deposits from sales. However, distributors who choose this plan should ensure that input tax is not recovered when purchasing these products.