How to Treat Discounts under VAT in UAE?

Businesses are confused about how to treat discounts under VAT in UAE. As per FTA, VAT will be calculated on discounted prices in UAE. Discount is often used as a sales strategy by businesses to attract their customers. A Discount is referred as a reduction in price.

VAT on discounted price in UAE

The seller deducts the discount from the gross or total price, and the buyer is supposed to pay the net amount. It is one of the oldest sales strategies to attract the buyer to buy more or convince the customer to buy the product or to make on-time payment, especially in the case of business to business market.

Businesses can give discounts to their customer for number of reasons, but the point here is ‘How are the discounts treated in UAE VAT? For businesses, the practice of providing discounts is not new, but they will be interested to know, how the practice of providing discounts will be treated in the UAE VAT regime? This is something new which businesses need to understand and accordingly make the suitable change, if any, considering the possible impact on their sales strategy.

How to treat VAT on discounted prices in UAE?

Most controversial question about discounts under VAT in UAE is whether VAT be charged on the value after considering the discount? Or on the full value of supply without considering the discount?

Federal Tax Authority (FTA) provides the guidelines on how to treat discount provided on the supply of goods and services. In UAE VAT, the value of a supply should be reduced in proportion to discounts made before or after the date of supply. In other words, the VAT will be charged on the value which is arrived after considering the discount.

For example, the value of supply is AED 10,000 and discount is AED 500. In this case, the value of supply will be AED 9,500 which is arrived after considering the discount value.

Conditions of discounts under VAT in UAE

The discount will be allowed to be reduced from the value of supply only if the following conditions which are prescribed in UAE VAT Executive regulations are met:

The customer has benefited from the reduction in price
The supplier funded the discount

The above conditions are quite clear that the benefit of discount should be passed on to the customer and more importantly, the discount should be funded by the supplier.

Let us understand with an example.

Alpha spare parts trading sells accessories worth AED 100,000 to Delta Automobiles. They also provide a discount of 5% on the price, as part of the special festival scheme.

Invoice
Sr.No	Description of Goods	Quantity	Rate(AED)	Per	Amount (AED)
1	Auto Spare Parts	100	1000	Nos	100,000
	Discount 5%				-5,000
	VAT @ 5%				4,750
	Total	100			99,750

In the invoice,

Auto Spare parts value is 100,000 AED
Discount of 5% i.e. 5000 AED is deducted from the of value supply
VAT is being charged on 95,000 AED (100,000 AED – 5000 AED * 5% VAT)

From the above example, it is clear that the VAT will only be charged on value after discount. As a result, we foresee that the existing business practice of providing discounts will continue without any changes as long as you meet the discount conditions mentioned above.

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