It is important for the seller of the goods or services to understand the tax treatment under UAE VAT Law and to comply with it for VAT Free Sale Promotions. The Federal Tax Authority (FTA) has issued a public clarification, “VAT – Free” special offers which have clarified the tax treatments during sales promotions.
According to the public clarification for VAT Free, if the seller who is a taxable person makes a sale or service which is taxable as per the UAE VAT Law, then the taxability as per the law must be followed. According to the UAE VAT Law, a taxable supply will be subject to VAT at 5% except those transactions specifically considered as zero-rating or exempt. So, it is important to understand that the taxability or tax rates are determined based on the VAT Law and the taxable person must follow it.
It is common to see various sales promotions to attract the buyers especially using special offers like VAT Free, No VAT Sale or VAT discounted etc. But the FTA states that it will be misleading to conduct a sales promotion as VAT Free because the seller has the responsibility to charge VAT on the taxable transaction. Seller may decide to collect or to give a discount for the value equal to VAT but there is no choice available to the taxable seller to decide on imposing VAT on the transaction. So, sales promotions using VAT Free may be incorrect because the VAT must be charged on the taxable value as per the VAT Law. Accordingly, sales promotions should not be conducted as VAT Free, instead, special offers may be given like ‘VAT on us’, ‘VAT by the seller’, 5% Discount etc.
How will be the tax treatment when the business conducts various sales promotions like special discount 5% or VAT on us or VAT inclusive etc.?
We know that the VAT will be charged on the taxable value of the supply or transaction. So, when any sales promotion or special offers are conducted, we should calculate the VAT on the taxable value after considering the promotion.
VAT Free Sale:
As discussed above, it is misleading to use the term VAT free sale for any promotion as VAT will be applicable on the taxable supply value as per the UAE VAT Law. So, it is advised to avoid promotions using term VAT Free and may conduct as VAT on us or VAT paid by seller etc.
VAT on us:
Even though a transaction is taxable with 5% VAT, the seller may opt to give special discount to the buyer and not to collect the VAT amount from the buyer. It is important to understand that in such scenario, the seller has the liability to remit 5% VAT to FTA on the full value of the transaction and not the discounted value. But practically if the display value is not revised after the sale, and if seller is not collecting the VAT amount from the customer, he will still be liable to pay the authority unless a tax credit note is issued to effect such revision.
For example: In a retail outlet, the normal sale value of a laptop is listed as AED 5,250/- and the seller offers a special VAT on us offer to the customers during new year sale. The customer can get a laptop for AED 5,000/- as part of that special sale. In this case, the VAT on the transaction will be AED 238.10/- (5% VAT included in AED 5,000/-). Hence the seller should pay AED 238.10/- to the FTA.
VAT Inclusive or Discount 5%:
If the sale promotion is conducted as VAT inclusive or 5% Discount, then the taxable value will be considered as the discounted price or the actual sale value. Accordingly, the VAT will be calculated on the actual sale value after discount.
In the above example, let us consider the offer declared was VAT inclusive and the seller offers the laptop for AED 5,000 as VAT inclusive against the original selling price AED 5,250/-. In this transaction, the VAT amount will be AED 238.10/- (AED 5,000 *5/105). So, the customer can buy the laptop for AED 5,000/- which will be VAT inclusive.
Similarly, let's consider that the seller makes the promotion with special discounted prices and displays AED 5,000/- instead of original price AED 5,250/-. The transaction amount AED 5,000/- is considered as included with 5% VAT and VAT amount will be AED 238.10/-.
To understand the difference in tax treatments, let us also consider another example. A motor car having a normal price of AED 157,500/- is kept for sale. The seller has considered ‘VAT on us’ offer and the promotional price is AED 150,000/-. The customer can get the car for AED 150,000/- after a discount of AED 7,500/-. As discussed previously, the seller should consider AED 150,000/- as the total value and must pay the VAT amount AED 7,142.85/- to the FTA. Hence the price collected shall be treated as inclusive of VAT. The seller has to follow similar tax treatment even if the promotion considered is as a discount or inclusive of tax.
It is also important that the seller should issue a tax invoice in any sales promotions or special sale offers in accordance with the UAE VAT Law. The tax invoice should reflect the rate of tax, the tax amount, and the gross amount payable in AED for every taxable goods or service supplied. It is the responsibility of the seller to account the taxable value and VAT amount and to submit the VAT returns in accordance with the UAE VAT Law.