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VAT on gold-making charges may impact other businesses

VATP029 states that reverse charge mechanism applies only to goods and not to services.

The Federal Tax Authority (FTA) has recently issued a public clarification - VATP029 - relating to B2B supplies of gold and products consisting mainly of gold (‘Gold Items’). As the clarification relates to gold making charges, CFOs/CEOs in other businesses (especially those in Designated Zones (DZs)) have generally ignored its impact on their operations.

B2B supplies of gold items

Since 01/06/2018, the B2B supplies of gold items are subject to reverse charge mechanism (RCM). A VAT-registered business is generally not required to charge VAT on the supplies of gold items to another VAT-registered business. The VAT-registered buyer accounts for the VAT under RCM. The suppliers generally receive a consideration for the supply of gold items to cover the price of the gold as well as for the making services. The jewellery suppliers have not charged VAT on the total consideration of the B2B supplies since 01/06/2018.

VAT029 - Single vs Multiple Supplies

VATP029 states that a supply of Gold Items and making services could be categorised as:

* A single composite supply of a Gold Item; or

* Multiple supplies consisting of both goods (gold) and services (making charges)

The clarification states, the supply will be regarded as a single composite supply of gold items if:

* The supply consists of a principal component (gold item) and ancillary/incidental elements (the making service), or these components are so closely linked that it would be impossible or unnatural to split;

*If a supplier charges a single price for the gold item, including the making charge; and

* The gold item and the making service are supplied by the same supplier

On the other hand, if a supplier charges separately, or reflects separately, for the Gold Items and for the making services, the supplier is regarded as making multiple supplies of individual components. Each component would be treated as a separate supply attracting corresponding VAT treatment individually.

Implications on jewellery

VATP029 states that RCM applies only to goods and not to services. If a supplier has charged, or reflected, a separate price for the making services for B2B supplies, the supplier would be required to pay VAT on such making services. The suppliers are apparently required to submit voluntary disclosure to correct the tax treatment since 01/06/2018. Voluntary disclosure could attract administrative penalties up to 30 per cent of tax amount till date. Another direct impact could be on B2C supplies of gold items under Tourist Refund Scheme. Akin to RCM, tourist refund scheme applies only to goods and not to services. As per the reasons given in VATP029, if the jewellers charged, or reflected, the ‘making’ services separately, they would be required to make voluntary disclosures relating to such supplies to the tourists.

International Jurisprudence and VATP029

It is interesting to note that VATP029 seems to differentiate between a single composite supply and multiple supplies primarily on the fact whether a single price has been charged or not.

The price on an invoice could be artificially split-up, or consolidated into a single price, by a supplier. The decision of the European Court of Justice (ECJ) in the case of Levob Verzekeringen BV and Part Service Srl are the landmark cases on this issue. The Court has held that the manner how the prices are reflected in a contract/invoice should not decide the nature of supplies. The determinative criteria should be the degree of linkage of two or more elements and the rationality to split those elements.

Other businesses

If charging, or reflecting, separately the prices for the goods and for services could attract VAT on services, it could have wide ramifications on many businesses.

To illustrate, Designated Zone suppliers often reflect separate prices for the supply of goods and for incidental services such as specialised packaging, freight etc. to the mainland customers. Though VAT would not have been charged on the total price of the supplies from DZ, VATP029 could directly impact the VAT on the service elements shown separately on the invoices. Similarly, manufacturers who charge for designing services separately before manufacturing & exporting the goods could also be impacted where the services itself do not qualify for zero-rating as exports independently. Alternatively, a leasing company could artificially split up the lease charges into (taxable) rental services and (VAT-exempt) finance services to save on VAT.

Action points

The jewellery businesses appears to have valid grounds to request for penalty waivers in relation to voluntary disclosures. It would be prudent for all businesses including the jewellery industry to first examine and understand the implications on VATP029 on their operations. A further clarification could be sought from FTA on the specific issues arising from the recent public clarification.

The writer is the managing director of AskPankaj Tax Consultants. For feedback and queries write to info@AskPankaj.com. Views expressed are his own and do not reflect the newspaper’s policy.