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VAT on Salik recoveries: The road less travelled

Pankaj S Jain/Dubai
Filed on April 12, 2021

Rental companies have contended that VAT should not be applicable on Salik recovered by them from the customers.


I still remember the tax conversations with UAE companies in early 2018. Company personnel were often intrigued by the tax nuances and global jurisprudence on tax issues. As the companies become increasingly conversant with tax in the last three years, the nuances discussed in 2018 are now being appreciated.

One such conversation was with a car rental company. We discussed about the VAT implications on Salik recovered by the car rental companies from its customers and how it could be taxable.

What is Salik and the VAT issue?

Salik refers to a smart electronic road toll system. A toll/fee is collected through a deduction from a prepaid user account when a vehicle passes through the toll gates.

In January 2018 itself, the Roads and Transport Authority (RTA) clarified that five per cent VAT is not applicable on any Salik services such as recharge, purchase new tag and toll fees.

Rental companies contended that VAT should not be applicable on Salik recovered by them from the customers. The likely assumption was that Salik is recovered on a cost-to-cost basis and VAT was not originally charged by the RTA. VAT was applied only on the administrative fee charged by the rental companies.

A subtle point was missed out that the RTA clarification referred to the Salik charged by RTA to the vehicle owners, and not necessarily the Salik recovered by the rental companies.

VAT on recovery of expenses

VAT is calculated on the ‘consideration’, which includes all that is received or expected to be received for the supply of goods/services.

A recovery of out-of-pocket expenses (even if on a cost-to-cost basis) received by a supplier could be taxable as additional consideration — once it is determined whether the recovery is a ‘disbursement’ or a ‘reimbursement’.

Disbursements refer to the recovery of amounts paid by a supplier on behalf of its customer. Disbursements are not subject to VAT. Reimbursements refer to the recovery of the expenses incurred by a supplier during the course of making a supply. Reimbursements are taxable as an additional consideration for the principal supply.

In July 2019, the Federal Tax Authority issued a detailed public clarification (VATP013) on disbursements and reimbursements to determine the taxability of any such recoveries.

Is recovery of Salik a disbursement?

One of the conditions for non-taxability, as a disbursement, is that the payment for the goods/services should be the contractual responsibility of the customer. The customer should have authorised the supplier to make the payment on his/her behalf. For Salik recovered by the rental companies, the responsibility to pay Salik does not appear to be on the customer.

As per Dubai Toll Law No. 22/2006, the owner of the vehicle is required to ensure compliance with the toll laws. The customers of a car rental company do not have any direct obligation under the toll laws.

Unlike fuel for the vehicle, the customer cannot also pay Salik directly to the authorities as different Salik accounts cannot be created for the vehicle registered to a person i.e. the rental company. The rental company does not appear to be paying Salik on behalf of the customer even though the customer may be the beneficiary/user of the road.

The contention that VAT should be charged only on the administrative fee and not on the cost-to-cost recovery of a non-taxed item is also fallacious. From manpower supply companies recovering the salaries of their employees to the consultants recovering taxi expenses from their customers, VAT is charged on the reimbursement of non-taxed items.

Common principles and penalties

The principles of disbursements and reimbursements are not limited to car rental companies. Businesses should evaluate the correctness of their tax positions taken on various recoveries from customers.

With the penalties for short payment of VAT reaching up to 350 per cent of the tax amount, “I told you so in 2018” would not be a right solution to any tax issue.

(Pankaj S. Jain is the managing director of AskPankaj Tax Consultants.)





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