In this Article, I have tried to ponder my thoughts on what may be the possible VAT implication on free of cost (‘FOC’) supplies, damaged goods, expired goods, and stock shortages.
Companies often introduce different types of offers such as buy 10 get 1 free or it gives free samples just to lure its customers. Is there any VAT implication on such freebies?
Apart from such enticing offers stated above, various retail sector companies have running stock with them. So, in their businesses it is quite often that they may have damaged stock items or expired stock items or even some shortages while procuring goods (which is not compensated by the supplier) or normal store shortages, items perished (like fresh fruits), etc. In such cases, whether they have considered any VAT implication on damaged or expired stock items?
In the ensuing paragraphs, I have tried to analyze it in more detail…
1. Goods sold on 10+1 or similar offer
Reference is drawn to Article (11)(1) on The Cases of Deemed Supply of VAT Decree Law which states that –
“A supply of Goods or Services, which constituted the whole assets of a Taxable Person or a part thereof, but are no longer considered to be as such, provided that the supply was made without Consideration shall be considered as Deemed Supply”
Thus, based on the given provision, can it be said that in case of 10+1 offers, the additional goods provided without consideration will be treated as deemed supply and accordingly taxable under VAT or can a view be taken that price charged for 10+1 offers is indeed inclusive of free product and no VAT shall apply on the free product?
The given issue is clarified by the FTA in its VAT guidance for Retailers which states that, “if a retailer offers a discount on the normal selling price of an item, or reduces prices in a seasonal sale for example, or perhaps offers “Buy One Get One Free,” then the reduced price actually paid by the customer is the consideration”
As per the above guidance, the FTA has stated that the price charged to the customer would be treated as consideration for all 11 (10+1) products including the free product on which VAT is applicable. Therefore, there may not be any requirement to pay VAT on free product considering it as a deemed supply. This treatment is in line with the practices in many countries.
2. Free samples
As described above, Companies generally provide free samples to market/ promote its product and attract customers. As per Article (11)(1) of VAT Decree Law (quoted in point no. 1 above), supply of goods without consideration would be treated as deemed supply. In the given case, as Companies are providing free samples without charging any amount, it may be treated as deemed supply for the purpose of VAT.
Hence, Company has following two options available in respect of deemed supply –
However, an exception is given under Article (12) of VAT Decree Law read with Article (5) of Executive Regulations which states that free samples will not be considered as deemed supply if the value of the same is less than AED 500 for each recipient. Moreover, even if the value of samples exceeds AED 500 but the total output tax on all deemed supplies for each recipient does not exceed AED 2,000 then also it will not be considered as deemed supply.
In view of the above, Companies need to ensure that it has appropriate records and documentation in place to justify that the said limit is not crossed or on a conservative basis they may take a position to pay VAT on all free samples irrespective of whether the limit is crossed or not.
3. Stock shortages, damaged/ perished stock items and expired stock items (which is not compensated by supplier)
In many FMCG sector companies, stock shortages while receiving goods, damaged/perished stocks, expired stocks frequently occur. Company passes stock adjustment entry (write-off) for the given stocks and take a hit to its Statement of Profit and Loss. Issue to be examined over here is whether such write-offs would be treated as deemed supply for the purpose of VAT and whether Company is liable to reverse any input tax initially recovered on procurement of stocks.
Unlike KSA, the UAE VAT Law does not specifically prescribe the treatment of shortage or write-off of damaged stock. It also does not specify the documents that are to be maintained by an entity in order to substantiate that there is no sale of stock but merely an accounting write-off. However, in my view, the write-offs on account of shortage and damaged stocks may not be subject to VAT due to the reason that there is no underlying supply of goods in given cases.
Additionally, input tax initially recovered on the damaged stock or expired stock may also not get impacted. This is due to the reason that Article (54) of VAT Decree Law states that, ‘the input tax paid on goods or services which are used or intended to be used for making taxable supplies’ is recoverable. In case of stock shortages and damaged stock, even if the goods are not sold/ supplied; they were procured with the intention of being used for taxable supply. Hence, in my view, input tax may be claimable even if there are stock shortages or the goods are damaged or expired. Article (59) of the VAT Decree Law which refers to ‘Change in use of procured goods’ may not apply as, in the cases discussed above, the goods itself would not be available because they are either damaged or lost or not usable (expired goods).
Alternatively, Company may opt to file private clarification with the FTA and confirm the tax treatment.
To conclude, I would urge businesses to carefully inspect all such transactions and ensure that correct VAT treatment is adopted with required documentations in place.
Gaurav Shivhare | Chartered Accountant – England & Wales and India | WTS Dhruva Consultants | +971564030888
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