Rebate Calculation and Impact of VAT Rebate on Consumers

Rebates or discounts are the concessions that suppliers offer as part of their sales and marketing strategies to attract customers. These are always considered as among the appealing factors in the gamut of shopping experiences for any customer for that matter.  As these are part of regular business practices, it is important to be aware of the impact of VAT on such rebates for proper accounting by suppliers as well as customers.

What are the different types of rebates offered in business?

Rebates are available in various forms or packages and apparently, the types of such marketing ways keep evolving day by day. For example, rebates can be in the form of percentage based method or a flat fixed amount, cash backs, rebate based on volume etc. Retailers can sometimes come up with such rebate methods based on the discounted offers that they themselves enjoy from their own suppliers. Customers are always recommended to understand the terms and conditions as per the agreement/document from the supplier to know about the calculation of rebate and impact of tax on the same.

How is VAT calculated on sales with rebates?

When a supply is made at standard rate VAT in normal cases is calculated on the sale value which is the value of the supply made. However, when there is a rebate offered by the supplier, the value of supply shall be reduced by the rebate amount and VAT shall be calculated on the reduced amount. For example, if the sale value is AED 500 and taxable at standard rate, then usually the VAT will be calculated as AED 25 which is 5% on AED 500. Now if the supplier gives a rebate of 10%, then the net amount payable by the customer and the value of supply will be AED 450. VAT in this case will be AED 22.5 (450 x 5 %).

What are the conditions to be met in order to apply VAT on value of supply at reduced amount?

As per the regulation, the value of the supply can be reduced by the amount of rebate only if following two conditions are met:

• There is genuine benefit for the customer because of this rebate
• The supplier itself funded the rebate

What are the VAT implications of volume based rebates?

Volume based rebates are usually given to the regular customers whose sales volume is substantial when the sale revenue of the supplier is considered. For example, the supplier can offer a rebate of 10% on the total sale value for a year of a particular customer, if and only if that total sale value of that year exceeds AED 1 Million. In the beginning two months of the year, the customer purchases products at lower amounts of AED 100,000 each month. Since the sale amount then has not crossed the threshold of AED 1 million, the tax invoices for these sales will be issued with no rebate and VAT will be calculated as AED 5,000 in each of the invoices (5% of 100,000). In the third month, customer purchases in bulk and sale value for that month are AED 900,000, which will make the customer eligible for a discount of 10% on total sale for the year. Supplier this time will be issuing a tax invoice with VAT calculated on total sale value (VAT of AED 45,000, which is 5% of AED 900,000) and then a tax credit note will be issued to account for the rebate that the customer earned (rebate in sale value of AED 110,000 and respective VAT AED 5,500) by crossing the threshold through the sales in three months together.

How is rebate reflected in the tax invoices?

Tax invoices are always to be issued as per the format prescribed by the regulation and the minimum disclosure items in a valid tax invoice includes value of the supply and the VAT amount. In cases of sales with rebate, the tax invoice shall have the original sale value, rebate or discount amount and the VAT calculated on the reduced price. 

CDA for rebate calculation in UAE

It is extremely important to apply the correct tax treatments and maintain proper accounting for all the business transactions to ensure compliance with the regulatory requirements. CDA Accounting and Bookkeeping Services LLC always recommend obtaining expert advice before making crucial changes in the tax and accounting processes. 

Also read, How is VAT Applicable on Banking Transactions in UAE?

If you have questions about tax treatments on your various promotional activities or any other business transaction. We have dedicated VAT team members who can guide you through and share with you insightful thoughts on recent developments in the VAT regime. 

Hope you have a clear idea of ​​​​the rebate calculation and VAT implications of rebate for customers. Still, have queries regarding the impact of vat rebate on consumers? Contact CDA for your VAT accounting related queries. We are happy to associate with you, providing our exclusive consulting services.