Supplies not eligible for input tax recovery under VAT in UAE

Under VAT in UAE, registered businesses are eligible to recover the VAT paid on purchase of goods and services used for business purposes. This is of course subject to the conditions discussed in our previous article. In addition, there are certain supplies on which input tax recovery is not allowed. Let us understand the nature of these supplies:

1. Supplies used to make exempt supplies

Certain supplies are declared as exempt in the VAT Law, such as supply of local passenger transport, supply of bare land, etc. A registered business cannot recover tax paid on purchase of inputs used to make these exempt supplies.

For example:Fatima Transports in Dubai purchases 10 units of Item A @ AED 1,000. VAT paid on the purchase @ 5% is AED 500. Item A was used to supply local passenger transport service, which is exempted. Hence, Fatima Transports will not be eligible to recover AED 500 paid on purchase of Item A, as it was used to supply an exempted service.

2. Entertainment services provided to non-employees

Registered businesses cannot claim input tax recovery on entertainment services provided to non-employees. These non-employees can include customers, potential customers, officials, shareholders, owners or investors.

Note that entertainment services include hospitality of any kind, including providing accommodation, food and drinks which are not provided in the normal course of a meeting and access to shows or events or trips provided for the purpose of pleasure or entertainment.

For example: Ali Automobiles provides 3 days accommodation to its client during their visit to the business premises. The hotel tariff for 3 days accommodation was AED 1,000, on which VAT @ 5%, amounting to AED 50 was paid by Ali Automobiles. Ali Automobiles is not eligible to recover input VAT recovery on this, as the service amounts to entertainment services provided to non-employees.

Note that catering and accommodation services provided by a transport service operator to non-employees will not be treated as entertainment service, such as an airline providing accommodation to passengers whose flight has been delayed.

3. Motor vehicles used for personal use

If a registered business has purchased, rented or leased motor vehicles for use in the business but it was used for personal use by a person in the business, then the tax paid on purchase, rent or lease of the motor vehicle cannot be recovered.

Note that here, motor vehicle means a road vehicle designed or adapted for the conveyance of not more than 10 people, including the driver. Trucks, forklifts, hoists or similar vehicles are not included.

A motor vehicle used in the business will not be treated as being available for personal use in the following cases:

• a. It is a taxi licensed by a competent authority within UAE
• b. It is registered and used for the purpose of an emergency vehicle, including by police, fire, ambulance or similar emergency service.
• c. It is used in a vehicle renting business, where it is rented to a customer

For example: Ali Automobiles in Dubai purchases 10 cars from the manufacturer, Omar Cars, in Dubai. Out of the 10 cars purchased, 1 car was used by the owner for his personal use. In this case, Ali Automobiles cannot recover input tax paid on purchase of the 1 car used for personal use.

4. Goods or services purchased for use by employees

Registered businesses cannot claim input tax recovery paid on goods and services purchased for use by employees, for which no charge is paid by the employees and it is for their personal benefit.

However, input VAT recovery can be claimed on such goods and services in the following cases:

• a. Where it is a legal obligation to provide the goods or services under an applicable labour law in UAE or the Designated Zone.
• b. Where it is a contractual obligation or documented policy to provide the goods or services for the employees to perform their role and it can be proven to be a normal business practice in the course of employment.
• c. Where the provision of goods or services is a deemed supply

For example: Ali Automobiles purchased gym equipment for use by its employees. The equipment is made available to employees as part of their employee benefits and is free of charge. VAT paid on purchase of the gym equipment is AED 2,000. Ali Automobiles is not eligible to claim input tax recovery on this purchase as the gym equipment is purchased for use by its employees.

Hence, businesses registered under VAT in UAE should make careful note of these supplies on which they will not be eligible to recover the input tax paid. It is important that input tax is recovered only on supplies which are eligible for input VAT recovery.

Input tax is the tax paid by a person on purchases or inward supplies. A major element of VAT in UAE is the provision to recover the tax paid on inputs. This means that a person can reduce the value of input tax eligible for recovery from the tax payable and only pay the balance amount as tax. This ensures that tax is paid only on the value added at each stage in the supply chain. Hence, the amount of input tax eligible for recovery plays an important role in the cash flow and operating expenses under VAT.

Let us first understand how input tax recovery works.

Process of input tax recovery

Example: In January ’18, Jehan & Co, in Abu Dhabi purchases 10 desktop computers @ AED 1,000 each. On this purchase, Jehan & Co. pays VAT @ 5% of AED 500. In the same month, Jehan & Co. supplies 20 desktop computers @ AED 2,000 to a consumer. VAT @ 5% is collected by Jehan & Co. on the supply, amounting to AED 2,000.

Here, output tax payable by Jehan & Co. for the month of January ’18 is AED 2,000.

Input tax recoverable for the month of January ’18 is AED 500

Tax payable = Output tax payable – input tax recoverable

Hence, tax payable by Jehan & Co. for the month of January, ’18 is AED 2,000 (Output tax payable) – AED 500 (Input tax recoverable) = AED 1,500.

Here, as you can observe, the tax paid on purchase by Jehan & Co. can be used to reduce their output tax payable. Only the balance tax payable is required to be remitted to the Government.

Conditions for input tax recovery

A registered business can recover the VAT paid on purchase of goods and services used for business purposes and subject to certain conditions. These conditions to be satisfied are:

a. Should be used to make Taxable supplies

The supplies on which tax is liable to be paid are called taxable supplies (i.e. supplies made at 5% or zero-rated supplies). Input VAT recovery is allowed to be claimed only on inputs used to make taxable supplies, not exempt supplies.

For example: Jehan & Co. purchases 20 units of Item A @ AED 50, for value of AED 1,000. Out of the 20 units purchased, 10 units are used to manufacture Item B, which is taxable and 10 units are used to manufacture Item C, which is exempt.

Hence, Jehan & Co. can claim input VAT recovery only for value of input used to make taxable supplies, i.e. 10 units used to manufacture Item B @ AED 50, which is AED 500.

b. Recipient receives and keeps the Tax Invoice

The recipient claiming input tax recovery on a supply should ensure that the Tax Invoice pertaining to the supply is received and kept in the records. The Tax Invoice should show the details of the supply related to the input tax recovery being claimed.

c. Recipient pays the consideration for the supply

The recipient claiming input tax recovery should pay or intend to make the payment of consideration for the supply within 6 months after the agreed date of payment for the supply.

Hence, the provision for input tax recovery is a very important component of VAT in UAE. Businesses need to ensure that they are able to correctly identify supplies on which input tax can be recovered, ensure that they fulfil the conditions for claim of input VAT recovery and claim the input VAT recovery on time. This will help in ensuring optimum cash flow and working capital in the business. All this work can be made easier by the use of a VAT software which will help automate each of these tasks with respect to input tax credit and leave you with enough time and resources for you to focus on your business.

How VAT rates applicable to Education Sector in UAE ?

Education is a very important sector in the UAE. With the introduction of VAT in UAE, the education sector has also been impacted with the additional VAT to be levied on certain goods and services supplied by educational institutions. Let us see a ready reckoner for the VAT rates applicable to the education sector:

Hence, under VAT, a concept of ‘qualifying educational institutions’ has been introduced. The educational services supplied by a qualifying educational institution will be zero rated. These qualifying educational institutions are:

a.Nurseries, preschools and schools.

b.Higher educational institutions owned or funded by the Federal or local Government.

These institutions should not charge VAT on the educational service they provide. They will also be able to recover VAT paid on related costs at the time of return filing. Further, the books and digital reading material supplied by these institutions will be also be zero rated.

For example: Abdul School in UAE is registered under VAT. As it is a school, it is a qualifying educational institution. Hence, Abdul School will not charge VAT on the tuition fees charged to students. Also, books provided as part of the course will also not be subject to VAT.

The educational services provided by any institution other than the qualifying educational institutions will be subject to VAT @ 5%.

For example: A private college, Azra Medical College, is registered under VAT. Since this college is not a qualifying educational institution, the course fees charged by Azra Medical College will be subject to VAT @ 5%. Also, the books and reading material provided by Azra College will also be subject to VAT @5%.

However, note that certain services provided by educational institutions, even if they are qualified educational institutions, will be subject to VAT @ 5%, such as school uniforms, electronic equipment, food and beverages, field trips for recreation and extracurricular activities.

For example: Abdul School is registered under VAT. Since it is a qualifying educational institution, the tuition fees charged by Abdul School are zero rated. Nevertheless, the school uniforms provided by Abdul School to its students will be subject to VAT @ 5%.

Also, the provision of transportation to students will be exempt, which means that the institutions will not charge VAT for providing school transportation. At the same time, they will not be able to recover VAT paid on related costs at the time of return filing.

For example: Abdul School which is registered under VAT provides transportation to its students to and from the school. As school transportation is exempt under VAT, VAT will not be charged on the school transportation provided by Abdul School. However, Abdul School will not be able to recover VAT paid on related expenses, such as uniforms for the driver and conductors.

Hence, educational institutions in UAE should note the tax rates applicable to the services provided by them and accordingly conduct their business activities.

In UAE VAT, the Supply of Goods and services are defined and classified separately. Before we discuss what supply of Goods or Services is, let us understand ‘Why one should know whether a Supply is for goods or services?’

This question becomes valid since the rate of VAT applicable on both is 5%.

Though the VAT is applicable at 5% on the supply of both goods and services, each of them are defined separately and governed by separate provisions of UAE VAT Law and Executive Regulation. This is because, the characteristics of supply of goods are different from services. Goods being tangible, do not pose any significant problems for determination of their removal, delivery, consumption point etc. While services being intangible, the manner of delivery of service could be easily altered and can pose problems in the determination of place, time and so on.

It is, therefore, important for businesses to know whether supply amounts to the supply of goods or supply of services, and treat supplies accordingly. In order to eliminate the dilemma involved in differentiating goods and services, the UAE Executive Regulation has in detail provided clarity for determining it.

What is Supply of Goods in UAE VAT?

In UAE VAT, Goods are defined as a physical property that can be supplied including real estate, water, and all forms of energy as specified in UAE VAT executive regulation. In other words, any tangible property that can be touched or felt are considered as Goods. Anything which meets the above, will be considered as a supply of goods in UAE VAT.

The following are the different forms of supply which are considered to be a supply of goods as detailed in the UAE VAT regulations:

1. A transfer of ownership of Goods or the right to use them from one Person to another Person

The transfer of ownership of goods or the rights to use them amounts to the supply of Goods. This includes transfer of ownership of goods under a written or verbal agreement for any kind of sale and ownership for a consideration in a compulsory manner in accordance with the provisions of applicable legislation.

Example: Furniture House sold furniture to Mr. Aleem. This will be treated as a supply of goods, because on sale, the ownership of the furniture is transferred to Mr. Aleem.

In case of transfer of rights to use any assets, it will be considered as a supply of goods only when the other person is able to dispose of them as an owner. Otherwise, it will be considered as a supply of services .

2. Any transfer of title of goods under an agreement

Any transfer of ownership of goods under an agreement between two parties which stipulates that the ownership of goods will pass at a future date or the agreement mentions the intention to transfer the possession of Goods or a future transfer of ownership of Goods.

Example: Furniture House supplied furniture to Mr Abdul in an agreement to receive payments in 6 instalments. This amounts to supply of goods, because the agreement mentions the transfer of ownership of the furniture to Mr Abdul on completing the payment of 6 instalments.

Typically, all hire purchases will qualify under this section.

3. Specific Supplies listed below will be considered as Supply of Goods

• Supply of water
• Supply of real estate including sale and tenancy contracts

• A supply of all forms of energy, which includes electricity and gas including biogas, coal gas, liquefied petroleum gas, natural gas, oil gas, producer gas , refinery gas, reformed natural gas, and tempered liquefied petroleum gas, and any mixture of gases, whether used for lighting, or heating, or cooling, or air conditioning or any other purposes

What is Supply of Services in UAE VAT

In UAE VAT, services are defined as ‘anything that can be supplied other than goods’ . In other words, any Supply that does not constitute a Supply of Goods under VAT shall be considered a Supply of Services including the provision of services.

While it is a broader definition to consider anything other than goods as a supply of services, the UAE Executive Regulation has detailed few specific forms of supply which should be treated as a supply of services.

The following should be treated as a supply of services:

• The granting, assignment, cessation, or surrender of a right
• Making available a facility or advantage
• Not to participate in any activity, or not to allow its occurrence, or agree to perform any activity
• The transfer of an indivisible share in a good
• The transfer or licensing of intangible rights, for example, rights of authors, inventors, artists, and rights in trademarks, and rights which the laws of the State deems to be such

Having said earlier, services in UAE VAT are defined in a broader way. The businesses who are in the Services sector need to take extra care in determining whether a supply is a service or goods. This is because, services are defined to include ‘non-physical’ property along with ‘anything’ else that can be supplied other than goods. Thus, it is capable of encompassing all transactions that escape the definition of goods into services.

In UAE VAT, on all forms of taxable supplies, VAT at 5% will be levied. In order to consider an activity as a supply, there are various components which should exist as defined in UAE VAT law. The term ‘Supply’ includes all forms of supply of goods or services supplied by a registered taxable person in the State of UAE for a consideration and in the course of conducting a business.

In most of the cases, all of the above components – exist and accordingly, you can levy VAT at 5%. However, in certain exceptional scenarios, an activity may take place which does not meet the conditions of a supply. For example, a taxable person may do something with the goods which does not involve making them available to another party, or goods or services may be provided to another person without any consideration.

If you take a look at the above example, supply may not fall within the definition of supply but in order to levy VAT on certain instances which do not give rise to taxable supply, the VAT law has listed down the activities which are also considered as supply. Such activities are known as ‘Deemed Supply’.

Deemed Supply instances

The following are the deemed supply instances on which the taxable person is required to pay VAT at 5%.

1. Assets which were part of their business are supplied for no consideration:

Once the assets are treated as business assets, input tax would be availed unless it is disallowed (blocked credit). Later, if these business assets, for any reason, are supplied without consideration, it would be deemed to be a ‘Supply’ and VAT becomes due on such transactions.

Ali Spares Ltd purchased 15 computers worth AED 30,000/- and paid VAT of AED 1,500/-. Ali Spares Ltd availed Input Tax Credit of AED 1,500/-. These computers were used for maintaining the records  and accounts of the business.
After years of usage, Ali Spares Ltd decided to give these computers away to the employees without any cost.
Though the computers were disposed of without any consideration, Ali Spares Ltd is liable to pay VAT.

2. Transfer of businesses assets from UAE to another GCC Implementing State or GCC Implementing State to the UAE.

Businesses located in UAE State (any GCC member country) may make stock transfers to/from another Implementing State. Any such transfer of businesses assets is considered to be deemed supply and accordingly liable for VAT.

Ali Spares Ltd purchased 15 computers worth AED 30,000/- and paid VAT of AED 1,500/-. Ali Spares Ltd availed Input Tax Credit of AED 1,500/-. 15 computers were used for maintaining the records and accounts of the business.

Later, 5 computers were permanently transferred to Saudi Arabia.
The permanent transfer of 5 computers will be considered as deemed supply and Ali Spares Ltd is liable to pay VAT.

However, if such transfers are made for any of the following reasons, it will not be treated as deemed supply:

• The transfer is treated as a temporary transfer in accordance with the Customs legislation
• The transfer is made as part of another taxable supply of these goods.

3. Goods used for the non-business purpose on which input VAT deduction is claimed.

Input VAT recovery is allowed to businesses only when the goods are used for making taxable supplies. If the supplies are used for any non-business purpose or exempt supplies, Input VAT recovery is restricted. In case, the Input VAT deduction is claimed and later, if those goods are used for the non-business purpose, it is considered as deemed supply and VAT becomes due to the extent of non-business usage.

Ali Spares Ltd purchased 15 computers worth AED 30,000/- and paid VAT of AED 1,500/-. Ali Spares Ltd availed Input Tax Credit of AED 1,500/-.
Out of These 15 computers, 14 were used for maintaining the records and accounts of the business and 1 was used for personal purpose.
Since 1 computer was used for the non-business purpose (on which input VAT was recovered) will be considered as deemed supply and Ali Spares Ltd is liable to pay VAT.

4. Goods and Services that a Taxable Person owns at the date of Tax Deregistration.

For some reason, if you de-register from VAT, the goods and services which you own on the date of de-registration will be considered as deemed supply

How Expo 2020 will impact the economy of UAE

Q3 of 2008 came a major downfall in the form of the great recession which impacted various economies. Dubai was one of the nations which was hit hard with the recession and the business life nearly came to a halt as its economy primarily depends upon real estate, tourism, retail and finance. The real estate industry was hit bad, and even the tourism suffered a 20% recline with the finance sector coming into debts. The city’s construction work also came to a halt and the employment opportunities shut down for expats which forced several foreigners to leave the country. The stat lines finally saw some daylight when some progress started in Q2 of 2013. Dubai soon recovered and is now all set to host the third biggest global event, Expo 2020. This massive event will impact the Dubai economy in several ways, if executed as per the plan. The economic benefit will come in 3 phases – pre-Expo, during-Expo and the legacy phase. As per a report in EY, the Expo 2020 is estimated to generate as many as 905,200 full-time equivalent (FTE) job-years in the UAE between 2013 and 2031. Now, that’s quite a startling number, isn’t it? Here are the key areas where the Expo is said to create a massive impact:

Infrastructure

The host city of World Expo typically invests a lot of funds in improving the infrastructure before the event. Shanghai, China which hosted Expo 2010, invested about $40 billion on its development which required 6 additional metro lines, roads, tunnels, bridges and bolt rail. Dubai Expo 2020 is expected to have the same impact in terms of infrastructure. Top financial officials claim that at least $8 billion worth infrastructure will be required to successfully build Expo 2020’s establishment. The host site, Jebel Ali which is spread across 480-hectare space will require new roads, metro extension, buildings, hotels and facilities to accommodate tourists.

Economy

It is expected that 25 million visitors will be attending the Expo 2020 and the numbers are only increasing each day. There was a 4% increase in the stock market index of Emirates right after it won the bid on Expo 2020. For the first time since 2008, its index went beyond 3000-point level. It is also said that Dubai’s economy will see a spike with an increase in hotel business, transportations, communication, catering and facilities required in the making of Expo 2020. From more tourism to more retail to more transportation, the GDP of Dubai will get impacted positively, thus resulting in the overall economic development. As per the Barclays report, over the next 3 years, Dubai’s GDP will experience a 6.4% growth and by 2020, there will be a 10.5% growth in the GDP.

Employment

With an event taking place at such a large scale, it is obvious that it will generate massive opportunities for people looking for employment. MEED reports, as of now, has anticipated 277,000 jobs opening in the making of Expo 2020, of which, 40% will belong in the tourism, travel and leisure sector. The construction sector will take up rest of the job percentage.

Media

Dubai media will take the world by storm by populating every channel with the grand Expo 2020. For a country to have a huge impact on its economy as a whole, it is extremely crucial to draw attention of the world through media. Almost every website will have articles, news, reports and quotes relating to Expo 2020. From celebrity involvement to investments and advertisements, Expo 2020 will have a great involvement in boosting Dubai’s economy

Any person who holds stocks of sweetened drinks (Includes Concentrates, powders, gel, extracts or any form that can be converted in to a sweetened drink), electronic smoking devices, liquids and tools for business purposes which are “excess in quantity” and excise tax was not accounted for, the same shall be regarded as a stockpiler and required to register for excise tax. “Excess in quantity” stands for the excisable goods in excess of the person’s average monthly stock level or twice the average monthly selling stock, based on a 12-month average. The check must be done on a product to product basis and if any product falls under “excess in quantity”, the person shall apply for excise registration as a stockpiler and account for tax.

Steps to identify the Stockpiler:

Step 1: Identify the excisable products of the company

Step 2: Compute the 2 month’s average sales quantity (based on previous 12 months sales quantity)

Step 3: Compute the one month average stock (based on   for previous 12 months average stock

((Opening stock Qty + Closing Stock Qty)/2))

Step 4: Assess the Inventory of excisable product as on date of the law came into effect

Step 5: Normal Stockpile of Excise Goods = Lower of Step 2, Step 3 or Step 4

Step 6: Excess Excise Stockpile = Actual Stock as on date of the law came into effect – Normal Stockpile

Step 7: Arrive on the RSP/ DRSP of the product

Step 8: Assess the Rate of Tax (50% or 100)

Step 9: Compute the excise tax due by Step 6 x Step 7 x Step 8