VAT in UAE: How can we address VAT transactions in Odoo?

VALUE ADDED TAX IN UAE

The Ministry of Finance has announced that VAT is likely to be introduced in UAE from January 1, 2018. Many business owners and residents have constant doubts and concerns about how this will affect them in terms of cost of living and cost of operations in their businesses.

Since it is new to the residents of the country, there will be many questions that need to be clarified, and such queries are answered by attending several seminars and public events related to VAT conducted by various industry specialists and officials. In this blog, I will be explaining what VAT is and how it can be incorporated in Odoo for complete accountability of your business transactions. With our exclusive configurations and tax settings, customized for UAE based companies, we ensure that this aspect can be tackled with ease.

What is VAT?

Value Added Tax (VAT), is an indirect tax, also referred to as a general consumption tax. VAT is imposed on most supplies of goods and services that are bought and sold. VAT is charged at each step of the business supply chain. This is what differs it from a regular sales tax. A sales tax, which is also a consumption tax like VAT, is imposed mostly on transaction involving goods, and is only imposed on the final sale to the customer. On the other hand, VAT is imposed on goods and services and charged throughout the supply chain, including the final sale. VAT is also imposed on imports of goods and services.

In VAT, the customers generally bear the VAT cost, while businesses collect taxes from customers and account them in behalf of the government as a tax collector. A business pays taxes it collects from the customers to the government while, it may receive a refund from the government on taxes paid to suppliers. The net result is the ‘value added’ tax receipt to the government.

Source: https://www.mof.gov.ae/En/budget/Pages/VATQuestions.aspx

VAT configurations in Odoo

To illustrate the process in Odoo, we shall do a sample business transaction so that we can get a clear idea:

When we purchase a particular product, we will have a vendor’s bill that looks like this:

As you can see, the taxes column in this bill captures the tax to be paid to the suppliers. The journal entry for the above mentioned transaction would be:

The same can also be done when we enter a sales transaction:

Journal entry:

Based on the above journal entries, we can have a look at the ledgers of both ‘Taxes Received’ and ‘Taxes Paid’:

The net effect of the ‘Tax Received’ and ‘Tax Paid’ will be the Net VAT payable to the government.