Be sure about VAT on PPE kits, masks
Many countries, during the peak phase of the pandemic, announced VAT exemptions or partial reductions of VAT rates on medical products such as PPE kits, face masks, hand sanitiser and gloves. The UAE is the latest to adopt the decision to apply zero per cent VAT on these products to support front- line health careworkers and the public.
Under the UAE’s VAT Law, the supply of medicines and medical equipment registered with the Ministry of Health and Prevention attract zero per cent. Interestingly, the question then arises whether a specific cabinet decision to apply zero per cent on PPE kits, masks and sanitisers is required? Were these products not under the category of medical equipment before and, consequently, always subject to zero per cent? Or is the Cabinet Decision issued merely to clarify to businesses to levy zero per cent instead of 5 per cent? The answer remains open. However, it poses a larger issue on classification and applicable VAT rate on health care products that maybe registered with MO H AP but may not necessarily qualify as medicine or medical equipment.
More retail- focused
In January, the UAE Government enacted the new Federal Law No. ( 8) of 2019 on Medical Products, Profession of Pharmacy and Pharmaceutical Institutions. As per the newlaw, medical products have been categorised into ( a) medicine, ( b) medical devices, and ( c) health care products. The new category, health care products, has been added to cover products used to protect general health. However, it is not intended for the diagnosis, treatment, healing, or prevention of a disease and it does not require a medical prescription. These are generally known as over- the- counter products.
The new law classifies medical products into three categories, while on the other hand, the UAE VAT Law covers only two, i.e. medicine sand medical equipment, which are intended to be used solely for diagnosis, treatment, healing, or prevention of a disease, to qualify for zero per cent VAT. Even before the new law was enacted, the products were registered with MOHAP under the category ( a) General Sale List ( GSL) to cover simple pharmaceutical products with limited medicinal usage, which cannot be considered medicines.
The products covered under GSL would typically include dietary supplements, medicated cosmetics, antiseptics, and disinfectants, which may contain pharmaceutical substances but not classify as medicine. The industry practice in the UAE has been to apply zero per cent VAT rate on medical and health care products based on the evidence of MOHAP certificate. Similarly, many retailers applied the rate on over- the- counter ( OTC) health care products following the tax position adopted by the pharmaceutical industry.
In the VAT seminars conducted in 2017, the FTA ( Federal Tax Authority) had clearly clarified that businesses should fulfil the two-tier test—i.e., (a) the goods must be registered with MOHAP or imported with its permission and ( b) should meet the definition of medications or medical equipment in order to qualify for zero rating on any healthcare product.
The above position taken by FTA casts the entire responsibility at each stage of the sale, and the VAT- registered buyer cannot rely on the tax position adopted on the previous sale. Dealers of OTC products are generally not technically qualified to analyse the eligibility of the product for zero- rating. And being liable for the adoption of correct tax rates, they would be at a disadvantage at the time of a future audit by FTA.
The enactment of the new Pharmaceutical Law reinforces the need for businesses to reassess product classification in the three categories In cases of ambiguity, it is always advisable to opt for a private clarification as an incorrect tax position will not only result in non- recoverability of 5 per cent VAT from customers, but potentially have substantial administrative penal consequences.
Industry practice has been to apply zero per cent VAT rate on medical and health care products.