Application of VAT under Profit Margin Scheme

Before discussing clarification issued by Federal Tax Authority regarding Profit Margin Scheme it is important to understand what is Profit Margin Scheme?

  • Profit Margin Scheme:

Profit Margin scheme is an option available to businesses where they are allowed to charge VAT only on the profits earned rather than on the full selling prices of the Goods. Profit means difference between Buying and Selling Prices of the Goods.

Federal Tax Authority has issued a public clarification whereby they have highlighted the conditions and Goods eligible to tax under the Profit Margin Scheme.

The primary condition for Goods in order to be eligible for profit margin scheme is that Goods should have been subject to VAT before the supply in Question. Means at the time when Goods were purchased or acquired VAT was applicable. This further means the Goods that were acquired before January 01, 2018 (The date VAT Law became effective) are not eligible for Profit Margin Scheme.

  • Goods Eligible for Profit Margin Scheme:
  1. Second Hand Goods (Movable)
  2. Antiques (More than 50 Years Old)
  3. Collector Items (Such as stamps, Coins etc.)
  • Conditions to Apply Profit Margin Scheme:

Goods are acquired from:

  1. A person not registered for VAT
  2. Taxable Person who applied Profit Margin Scheme OR
  3. The supply was made by a taxable person that never recovered the input tax on those Goods in accordance with Article 53 of cabinet decision No 52 of 2017.

Federal Tax Authority further stressed that those businesses should keep proper documents to support their claims that goods were purchased under profit margin scheme or acquired after January 01, 2018.