Zero-Rating International Transportation Service for Passengers and Goods

CA Rajiv HiraCA Rajiv Hira    27 November 2019
Zero-Rating International Transportation Service for Passengers and Goods

International Transportation can have two sides of the same coin.

Lets review a scenario of goods transportation from outside the state to state.

(a)  Dubai Freight Company provides transportation of goods to a customer from UK to UAE (in Sharjah warehouse). Dubai Freight Company collects goods from UK, airlifts the same from UK to Dubai Airport & from Dubai Airport to Sharjah warehouse. In this case Dubai Freight Company, is providing single transport service to the customer and should qualify as International Transportation, subject to 0% VAT.

(b)  In above example if Dubai Freight Company sub-contract transport service to a third party. VAT applicability should be assessed for each sub-contract. Sub-contractor when invoicing should evaluate if his contract is starting from outside the state & ending in the state or starting from state and ending outside the state for qualifying the transaction to be international transportation (subject to 0%), for independent domestic transaction -standard VAT of 5% should apply. 

Although the sub-contractor in this case will charge VAT for the domestic leg of the transaction, Dubai Freight Company can claim the input tax against point (a), considering supply is qualifying under international transportation definition.

I understand, there are multiple views on the subject, my inference is from the ER Article (33) & Article (22). 

In case of any alternate view, would like to understand the administrative process for compliance also, happy to discuss.

Reference Article:

ER - Article (33) - Zero-rating international transportation services for Passengers and Goods 

1. The supply of international transportation Services for Passengers and Goods and Transport-related Services shall be subject to the zero rate in the following cases: 

a. Transporting passengers or Goods from a place in the State to a place outside the State. 

b. Transporting passengers or Goods from a place outside the State to a place in the State. 

c.  Transporting passengers from a place in the State to another place in the State by sea or air or land as part of a supply of an international transport of those passengers if either or both the first place of departure, or the final place of destination, is outside the State. 

d. Transporting Goods from a place in the State to another place in the State if the Services are supplied as part, or for the purpose, of the supply of Services of transporting Goods either from a place in the State to a place outside the State or from a place outside the State to a place in the State. 

2. The following Goods and Services shall be zero-rated if they are supplied in respect of the transportation services of passengers or Goods to which either Clause (1) of this Article applies or which are treated as taking place outside the State: 

a. The Goods which are supplied for use or consumption or sale by or on an aircraft or a ship. 

b. The Services supplied during the supply of transportation services. 

c. The Service of insuring, or the arranging of the insurance, or the arranging of the transport of passengers or Goods. 

3.  A supply of a postage stamp issued by Emirates Post Group shall be zero-rated where the postage stamp may only be redeemed for transportation of Goods to a place outside the State. 

ER - Article (22) - Place of Supply of Certain Transport Services 

1.  The place of the supply of each transportation service is the place where the supply of that transportation service commences, where a trip includes more than one stop and consists of multiple supplies in accordance with Clause (5) of Article (4) of this Decision. 

2.  The place of supply of Transport-Related Services shall be the same as the place of supply of the transportation service to which they relate. 

 

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