Discounts are often used by companies as a sales strategy to attract customers. The discount is called a price cut. The seller deducts the discount from the total price or the total price, and then the buyer pays the net amount. Inducing buyers to buy more goods or driving them to buy products or pay on time is one of the oldest sales strategies, especially in the B2B market.
There are many reasons for offering discounts, but the focus here is “how to use UAE value-added tax for discounts? For companies, the practice of offering discounts is nothing new, but they will want to know how to treat them in the UAE VAT system The practice of offering discounts? This is a new thing that companies need to know, and considering the possible impact on their sales strategy, make corresponding changes (if any).
A common question that most of us may encounter is whether after considering discounts, will VAT be charged on value? Or based on the full value of the supply without considering discounts?
Let us understand the provisions on discounts in the UAE VAT Law and answer the above questions.
The UAE VAT Law provides guidelines on how to treat discounts in the supply of goods and services. In the UAE VAT, the value of the supply should be reduced in proportion to the discount before or after the supply date. In other words, the value-added tax will be charged in consideration of the value after the discount.
For example, the supply value is 10,000 dirhams and the discount is 500 dirhams. In this case, the supply value will be 9,500 dirhams, which is derived after considering the discount value.
The discount can be deducted from the supply value only when the following conditions stipulated by the UAE VAT administrative regulations are met:
Customers benefit from reduced prices
Vendor funded discount
The above conditions are very clear, the benefits of discounts should be transferred to customers, and more importantly, discounts should be funded by suppliers.
Let us understand with an example.
Ali Spares Ltd sold parts worth AED 100,000 to Abdul Automobiles. As part of the holiday program, they also offer a 5% discount.
Sl.No product description quantity quantity rate (AED)
1 Spare parts 100 1000 100,000
VAT @ 5% 4,750
Total 100 99,750
In the invoice
1. The value of spare parts is 100,000 AED
2. Deduct a 5% discount from the value supply, which is Dh5,000
3. VAT charges 95,000 AED (100,000 AED – 5000 AED * 5% VAT)
It is obvious from the example above that the value-added tax will only be charged at the discounted value. Therefore, we can foresee that as long as you meet the above discount conditions, the existing business practice of providing discounts will continue without any change.