VAT on Transportation in UAE Under UAE VAT Law | Latest Updates From FTA
The recent Public Clarification issued by FTA is intended to shed light on the treatment of ‘public transportation’ and its interpretation for the purposes of identifying the qualifying means of transports such as buses or trains which can be treated as zero rated under the UAE VAT Law.
Applicable Provisions of the Law:
As per the Clause (4), Article (45) of the Federal Decree-Law No. 8 of 2017 on Value Added Tax and as per Article (34) of Cabinet Decision No. 52 of 2017 on the Executive Regulations (“VAT Executive Regulations”):
The supply of the means of transport shall be subject to the zero rate in the case of, a supply of bus or train that is designed or adapted to be used for public transportation of (10) or more passengers.
Analysis of the provisions of the Law:
One such qualifying means of transport includes the supply of a bus or train that is designed or adapted to be used for public transportation of 10 or more passengers.
This Public Clarification discusses the definition of ‘public transportation’ and its interpretation for the purposes of identifying those buses or trains which qualify to be supplied at the zero rate under this provision.
As a result, those means of transport which are designed to transport a specific category of individuals, such as school students or employees of a business, do not meet the conditions to be treated as a qualifying means of transport for the purposes of the zero-rating provisions. Such means of transport shall therefore be subject to the standard rate of VAT.
This denotes that, any supplies of means of transport (eg supply of buses) made for the use of schools or business are subject to 5% tax at the time of its purchase.
It has also been clarified by the FTA that, whether or not the original supply of the means of transport qualified for zero rating has no impact on the VAT liability of any charges made for the supply of transportation services.
In short, the VAT treatment of the means of transport when purchased does not determine the VAT treatment of any supply of transport services made using that vehicle.
Providing services to business for transporting its employees from one place to another still remains exempt under law. Therefore, where local transport is made for a charge to a defined group of people, any VAT incurred on the costs of purchasing the means of transport, fuel etc. in order to provide that service is not recoverable.
Difference between private transportation & public transportation in the VAT Law:
What is Private Transportation?
FTA defines ‘Private Transportation’ as ‘all means of transportation used to transport a specific group of people under contracts.’
What is Public Transportation?
The transport used for ‘public transportation’ shall be interpreted by the FTA as, ‘all means of mass transportation used to transport all individuals without specifying any category.’
The difference between the two forms of transportation therefore means that public transportation should be available for all individuals without exception. Public transportation would not include transportation which is only available to a specific category of user.
To summarize, if a bus or train is designed or adapted for a specific class or group of people, or is only available for use by a specific class or group of people, it shall be considered to be designed or adapted for use for private transportation. And thus, the supply of such means of transport will be taxable.
Factors relevant to identify Public Transportation:
In order to determine whether a bus or train is designed or adapted for use for public transportation, the following factors would be relevant:
- Features exist which allow passengers to pay for the transportation or to indicate they possess a ticket e.g. a payment booth, ticket scanner or device to take payment;
- There is branding either within or outside the vehicle advertising the transport service, indicating the transportation is available to all;
- There is branding or other features indicating regulation of the means of transport by the entity regulating public transportation in the Emirate of operation;
- The intended use of the means of transport is to transport members of the public without exception or limitation to a specific group.
By considering above points, the following means of transports are not be considered to be used for public transportation:
- School buses;
- Buses used to transport groups of employees or workers to or from a place of work;
- Shuttle buses used to transport hotel guests to other locations e.g. a mall, airport, park, or other tourist attraction.
Hence the and the supply of such means of transports shall be subject to VAT at the standard rate.
VAT Liability of Transportation Services:
To add on, services related to transportation shall be governed by Clause 4 of Article 46 of the VAT Law and Article 45 of the Executive Regulations which state that any supply of local passenger transport shall be exempt from VAT where the supply is of local passenger transport services in a qualifying means of transport by land, water or air from a place in the UAE to another place in the UAE.
For the purposes of the exemption from tax, one of the qualifying means of transport listed includes a motor vehicle, including a taxi, bus, railway train, tram, mono-rail or similar means of transport, designed or adapted for transport of passengers.
To conclude, this clarification issued by FTA elucidates the supply of means of transport and its taxability, based on the intended use of such supply. If the supply was not done for using for the public transport, it shall be taxable at standard rated. Otherwise if intended to use for public transport, the supply of means of transport will be Zero Rated.
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