VAT Corner: What is the nature of supply?

Taxpayers can establish that anything which is not a supply of goods will be considered a supply of services
Taxpayers can establish that anything which is not a supply of goods will be considered a supply of services

Dubai - In our previous articles, we have discussed in detail about supplies and the various categories of supplies; in this article, we will discuss the nature of supply in detail.



By Mahar Afzal

Published: Sun 2 Jan 2022, 6:34 PM

Nature of Supplies

Article 1(20) of the GCC VAT Framework (‘the Framework’) states that “Any form of supply of Goods or Services for consideration” is called supply. From this definition, taxpayers can infer that supply by nature can be classified into (i) a supply of goods or (ii) a supply of services. It’s very important to establish whether a registered taxpayer is supplying goods or services since different rules are applicable to identify the tax point, establish the place of supply, adopt a proper tax position and apply correct rates.

Supply of Goods

Article 5 of the UAE VAT Law (‘the Law’) states that: “the following shall be considered a supply of Goods:

1. Transfer of ownership of the Goods or the right to use them to another Person according to what is specified in the Executive Regulation of this Decree-Law.

2. Entry into a contract between two parties entailing the transfer of Goods at a later time, pursuant to the conditions specified in the Executive Regulation of this Decree-Law”.

Article 2 of the VAT Executive Regulations (‘the Regulations’) states that:

1. “A transfer of ownership of Goods or of the right to use them from one Person to another Person shall include for instance the following:

a. A transfer of ownership of Goods under a written or verbal agreement for any sale;

b. A transfer of ownership for a Consideration in a compulsory manner pursuant to the applicable legislations.

2. For the purposes of Clause (1) of this Article, a transfer of the right to use any assets shall not be treated as a supply of Goods unless the other Person is able to dispose of them as owner.

3. Entry into a contract between two parties causing the transfer of Goods at a later time shall be considered a supply of Goods where the agreement mentions a transfer or intention to transfer the ownership of Goods or a future transfer of ownership of Goods.

4. The following shall be considered a supply of Goods:

a. A supply of water.

b. A supply of real estate including sale and tenancy contracts.

c. A supply of all forms of energy, which includes electricity and gas, including biogas, coal gas, liquefied petroleum gas, natural gas, oil gas, producer gas, refinery gas, reformed natural gas, and tempered liquefied petroleum gas, and any mixture of gases, whether used for lighting, or heating, or cooling, or air conditioning or any other purpose”.

In the light of the above wording of the law and regulations, we can establish that where the ownership of the goods is being transferred or right to use is being given along with the right to dispose of the goods, under the agreement (written or verbal) or in a compulsory manner as required by the legislation, will be considered a supply of goods. Even the ownership of the goods is being transferred in the future under the contract which mentions transfer, intention to transfer or future transfer, still, it will be considered a supply of goods.

The word contract has not been defined in the Framework, Law, and Regulations, businesses can conclude that’s its formal agreement which is binding for both/all related parties and legally enforceable by the law. Usually, contracts are in written form, but the regulations specifically highlighted that verbal agreement that is binding for all related parties will fall under the definition of contract as well. The supply of goods under the contractual terms includes sales of goods where ownership is being transferred, handing over goods under the hire purchase agreement etc.

The supply of goods can be in the compulsory form like the seizure of goods by statutory authority, closing stock at the time of liquidation of the business, use of goods for non-business use or for private purposes, assets retained by the taxpayer after deregistration etc.

Under the special rules given above in Article 2(4) of the Regulations, supply of water, supply of real estate and supply of all forms of energy is also called the supply of goods. So, where water is being supplied, or real estate is being supplied in the form of sales or lease still it will fall under the definition of supply of goods. Energy like electricity and any form of gas whether used for lighting, or heating, or cooling, or air conditioning or any other purpose will fall under the supply of goods.

Supply of Services

Article 6 of the Law states that “A supply of Services shall be every supply that is not considered a supply of Goods”. So, taxpayers can establish that anything which is not a supply of goods will be considered a supply of services. Article 3 of the Regulations specifically states that supply of services includes (i) granting, assignment, cessation, or surrender of a right, (ii) making available a facility or advantage, (iii) Not to participate in any activity, or not to allow its occurrence, or agree to perform any activity, (iv) The transfer of an indivisible share in a good; and (v) The transfer or licensing of intangible rights for example rights of authors, inventors, artists, and rights in trademarks, and rights which the legislation of the State deems to be within such category.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above is not an official, but a personal opinion of the writer. For any queries/clarifications, please write to him at compliance@kresscooper.com.


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