More clarity needed for VAT on healthcare and education
The UAE Cabinet has approved the Federal Budget for 2019 with more than half of the budget allocated for community, education and healthcare keeping in mind the UAE’s National Agenda 2021.
To make the UAE a preferred education and healthcare destination in the world, the government is taking all efforts to improve and build a robust infrastructure (including setting up world-class hospitals, universities, etc., in the country) and also ensuring all constituents of the eco-system are geared up. To make it happen, even the newly introduced VAT law has been carefully drafted to play an important role in shaping up these sectors.
Education and healthcare have largely been kept out of VAT, with majority services zero-rated (i.e. taxed at zero per cent). This allows the service providers to reclaim VAT paid on their expenses as cash refunds.
Despite the sectors largely not taxed, certain ambiguities need clarity. This article aims to highlight some of the challenges and requests the government to provide more clarity.
In the education sector, the rate of VAT on the supply of buses for transportation of children is not clear. The UAE VAT law treats supply of buses to be used for ‘public transportation’ as a zero-rated supply, only when the bus is designed and adapted for the use of 10 or more passengers. The challenge is identifying what constitutes ‘public transportation’ and whether the supply of school buses qualify for zero-rated tax treatment.
One of the arguments is that ‘public transportation’ only means transportation services provided by a government body such as the Roads and Transport Authority (RTA) for the public at large and thus, a bus will qualify for zero-rate only when supplied to the RTA. This also makes the entire supply chain out of VAT as the RTA’s output services are VAT exempt. This restricts its ability to recover any VAT paid on procurement of buses.
Since school transportation services are also exempt from VAT, buses procured by schools should qualify for a zero-rate of VAT. The term ‘public transportation’ should be interpreted to include school transportation as well and if not, this would significantly increase the cost of education. That does not appear to be the intention of the legislators.
VAT on leasing of buses by an educational institute to another to be used by them for transportation services is complicated and unclear. This transaction can either be entered as a dry lease (i.e. lease of buses only) or a wet lease (i.e. with drivers). The clarity needed from tax authorities is whether such supply qualifies as a zero-rated supply of buses for public transportation (typically when supplied on a dry lease) or does this qualify as a ‘local passenger transport’ service exempt from tax (when supplied with a driver) or should this be taxed at standard rate of five per cent on the basis buses are not used for public transportation.
In the healthcare sector, issues that require clarity include VAT on transactions entered into between businesses and not directly with the end consumers/patients.
The UAE VAT law typically zerorates healthcare services necessary for the treatment of the ‘recipient’ of the supply. Who’s a ‘recipient’ sometimes becomes a matter of debate. Does the recipient only mean the actual patient undergoing the medical treatment, or does it include a contractual recipient when the contract is between two hospitals or clinics or between a hospital and a doctor. The issue is vexed because the provision of service contractually is to the business owner, and not to the actual patient receiving the treatment.
For example, a hospital contract with a diagnostic clinic to receive results of blood samples of patients treated by the hospital. Will the hospital become a ‘recipient’ eligible for zero-rate because the results are received by the hospital and fee for such results is also paid by the hospital and not directly by the patient (though the patient is in turn charged later for the tests). Zero-rate only applies when the healthcare service is provided for the ‘treatment of the recipient’ and if the hospital is the recipient and not the patient himself, should VAT at five per cent apply is the vexed question.
Though, the underlying benefit is always for the patient undergoing treatment, what needs clarity is whether B2B (business to business) services can also be zero-rated. Any VAT applied to such allied but intrinsically linked healthcare related services can lead to massive cash flow concerns for the healthcare service providers.
What constitutes a basic health care service necessary for the treatment of the patient is also unclear. Should the provision of a luxury room to the patient undergoing surgery be subject to VAT at five per cent since the provision of a luxury room may not qualify as the provision of a zero-rated basic healthcare service. Or, the surgery in itself is a basic healthcare service and provision of a luxury room should be bundled to consider the entire amount received from the patient eligible for zero rate VAT.
Clarity is also required on identifying a ‘medical equipment’ for zero rate VAT. For equipment to be zerorated, it should be registered with the Ministry of Health (MoH) and qualify as a ‘medication’ or ‘medical equipment’ as per the government’s Cabinet decision. Among other conditions, the equipment should achieve the intended objective in or on the human body.
A clarity will ensure avoidance of any unnecessary tax complications for these sectors. VAT is an indirect tax, if not recovered from the final customers, it can increase the cost of doing business, eventually not fulfilling the government’s objectives of making the UAE a preferred destination for world-class education and healthcare.
VAT on leasing of buses by an educational institute to another to be used by them for transportation services is complicated