Free supplies are part and parcel of every business across the globe. Marketing and sales managers spend considerable time drafting and assessing various schemes to entice the consumers by using the term ‘free’ for selling their products or services. Especially when the economies of the globe are not doing well, industries from automobile to small retail shops all structure one or the other scheme for offering freebies to attract and develop customer loyalty for subsequent purchases.
Generally, quotes like ‘one plus one, 50% Flat sale, upto 90% off, Two plus Two, voucher of 50% off on the next purchase, cash voucher of 100 AED, one point on purchase of every 10 AED, Redemption coupons, discount coupons etc.’
In nutshell, such freebies are generally involved in providing discounts or offer free/additional products on your current or next purchase.Easy said than done, the entire ecosystem around which such structuring is done to achieve the end objective is complex.
In this article we are only touching key points regarding the freebies given/ distributed by the companies and not discussing the loyalty programme ecosystem.
As we know, VAT is applicable on the consideration received for supply of goods and services. However, UAE VAT Laws also provide for specific deeming provisions which state that VAT should be applicable even on supplies made without consideration. Whether a supply is free of consideration or should be considered a discounted supply also depends on case to case basis. For e.g. a person issues an invoice providing a discount of 100%from the sales value, whether, this shall be considered as discount or a free supply is a question one should ask.
Once you decide if the supply that you have affected is without consideration, then one needs to ascertain the VAT implications on such supply. As per Article 11 any deemed supply shall be subject to VAT @ 5%. Alternatively, VAT may not be applicable under the following circumstances:
To put the above clauses in simple words:
The above exceptions are very important to understand and apply to ascertain the taxability of such transactions as there are various inputs used in the business which are either supplied to employees or to customers for which no consideration is received. Also, since the companies are unable to keep a tab on such supplies, the companies end up availing input VAT without discharging VAT.
Accordingly, where anyone can establish/ substantiate the fact they have fulfilled any of the above conditions, supplies on free of cost basis should not be subject to VAT.
Where one is not able to substantiate the above, then such transactions may attract VAT @ 5%. Once VAT is applicable on such transactions, there are various other aspects such as valuation, issuance of invoice, date of supply and reporting issues which require detailed deliberation.
UAE VAT Law’s valuation provisions provide that the value of such deemed supplies shall be the total cost of the goods and services provided in UAE. Accordingly, where one supplies such products on FOC basis, in such a case VAT should be paid on the total cost of such products.
Given that there are various industries/ scenarios, wherein, it is difficult to ascertain the cost of each such supply, in such a case an alternate option may be considered to discharge VAT on the sale price of such supplies.
As for issuance of invoice, currently there are various practices being adopted in the industry. In certain cases, the companies are not issuing invoices, considering such supplies are on FOC basis and thus no consideration is being recovered from the customer. Also, there are certain companies who are issuing invoices at zero value or reducing the value of such supply by 100% discount after reflecting the full value of such supply.It is important that one should adopt the correct mechanism for issuing of such invoices to customers as even issuance of incorrect invoices may also attract VAT penalty.
Further, ascertaining the date of supply for such supplies is also important as this specifically provides that for deemed supplies the date of supply shall be similar to the provisions of other normal supplies. Accordingly, one should discharge VAT as per the respective provision applicable for such supplies.
It is important to note that even the other GCC countries who have implemented VAT have provided similar provisions.KSA has coined such supplies as ‘Nominal Supplies’ and defined it as:
‘A Nominal Supply of Goods or services, made by a Taxable Person is treated as a Supply of Goods or services by the Taxable Person for Consideration as part of the Taxable Person’s Economic Activity, except as otherwise provided by this article.’
Similarly, Article 10 of the Bahrain VAT Laws specifically provides that following supplies should also be considered as deemed supplies:
Though the basis of classification of deemed supplies are same i.e. supplies without consideration. However, there are various other conditions whereby supplies may not be considered as deemed supplies.
Accordingly, all such supplies must be carefully analysed on various aspects of valuation, date of supply and reporting requirements which should be analysed in detail before ascertaining the correct VAT treatment and to be compliance with the VAT Laws.
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