Categories of VAT Supplies

Overview of the Article???????????

In our previous article, we had an overview of three different types of supplies, and in this article, we have discussed these categories in detail.

Categories of Supplies

There are three main categories of supplies which are out of scope, exempt and taxable supplies. Taxable supplies can further be classified into zero-rated, reduced-rated, and standard-rated supplies. Let’s discuss each category in detail.

Out of Scope Supply

Supply, by nature, can be a supply of goods or supply of service and we will discuss it in detail in our coming Articles. Usually, the place of supply of goods is where goods are being supplied and the same has been mentioned in the Article 27(1) of the Law. The place of supply of installed or assembled goods is where assembly or installation is being performed [Article 27(2) of the Law]. Generally, a place of supply of services is the place of residence of the supplier [Article 29 of the Law] unless it falls under the special nature of services which has been given in Articles 30 and 31 of the Law.

So, based on the place of supply principles and special exclusions, companies can decide the supply of goods or services is falling within the scope of UAE VAT or not. If these are not falling in the scope of UAE VAT, it will be considered out of the scope supply, and UAE VAT would not be applicable on these supplies. Still registered businesses in UAE have the right to claim input tax on these supplies that are being made outside the State which would have been Taxable Supplies had they been made in the State [Article 54(1)(b) of the Law].

Key examples of out-of-supplies are goods supplied, installation services performed, events held, transportation services starting out of UAE etc. Some supplies like salaries, gratuities, Intra VAT group supplies, tips, statutory charges (traffic fines), transfer of a business as going Concern, etc. have been specially excluded from the UAE VAT.

Exempt Supply

Article 1(26) of the Law states that “A supply of Goods or Services for Consideration while conducting Business in the State, where no Tax is due and no Input Tax may be recovered, except according to the provisions of this Decree-Law”. Article 46 of the Law declares that supply of financial services, second supply of residential property, supply of bare land, and supply of local passenger transport are exempt supplies.

So, businesses that are purely falling in the exempt supply categories, don’t have any right to charge output tax on its supplies and they will not be able to claim input tax as well. Such input tax will become a cost of the businesses.

Zero Rated Supply [Taxable Supply]

Article 1(28) of the GCC VAT Framework states that “Supplies on which Tax is charged in accordance with the provisions of the Agreement, whether at the standard rate or zero-rate, and for which associated Input Tax is deducted in accordance with the provisions of the Agreement”.

Zero-rated supplies can be classified as taxable supplies and it will be subject to tax at zero percent. Businesses are liable to charge output tax at zero percent on such supplies and registered companies have the right to claim input tax related to the zero-rated supplies.

Article 45 of the Law provides a list of zero-rated supplies and some of them are export of goods, international transport of passengers, the first supply of residential property within the stipulated time, supply of basic health care services etc.

Reduced Rated Supply [Taxable Supply]

In the UAE, currently, there is no concept of the reduced rate, but in the long run, we expect that such rate will be introduced.

Standard Rated Supply [Taxable Supply]

Any supply which is in the scope of the Law and not falling under the exempt and zero-rated category will be considered a standard-rated supply. The Law specifically does not provide a list of standard-rated supplies. Registered businesses are liable to charge a standard rate of five percent at the time of supply and they have the right to claim input tax based on the generic input tax rules.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above is not an official, but a personal opinion of the writer. For any queries/clarifications, please write to him at [email protected].