VAT implication in designated zones


Aastha Rangan
VAT implication in designated zones
Director - VAT Advisory

Email : [email protected]

New Year started and Christmas buzz just got over with lots of festive shopping in each household. Almost all the retail outlets and online shopping sites offered huge discounts and promotional offers to buyers. According to Davis Kallukaran, Managing Partner, Crowe Oman, April is heading with VAT implementation date nearing and all that you would like to know is how VAT will affect the retails industry when offering promotions, discounts and free gifts.

The Articles of the Oman VAT law states about the deeming provision where VAT should be applicable even on supplies made without consideration provided that input VAT is recovered on acquiring those goods. In retail industry, free gifts, discounts, raffle draws, bundle promotions and so on are the part and parcel of doing business. The Oman VAT law has been carefully drafted to include all the supplies made ‘without consideration’ and this bring challenges to the retail segment to ensure that they do not miss paying VAT on the gifts, samples and demo stocks given to the customer. Though these supplies will be taxable, supplies ‘up to a value’ to be specified by Executive Regulation will be excluded from the applicability of tax provisions in order to ignore minor value transactions.

Let us look into some of the most prevalent scenarios in Oman to understand the VAT implications. One of the most traditional sale strategy is ‘discounts’ where the customer is benefited by reduction in price. Now the question which retailers will have is; will VAT be charged on the value after considering the discount or on the full value of supply without considering the discount? Practically, VAT should be collected on the discounted price paid by the customer.

In the case of ‘bundle offer’ given by retailers like buy one get one free or buy three for RO 10, a single consideration is received from the customer and will be construed as the consideration for all the items sold and accordingly VAT will be applied. The key challenge foreseen for retailers here will be how the tax invoice will disclose the same, how the pricing in the product master will accommodate the offer and how the accounting module will be redesigned to reflect correct VAT treatment. Though this may look gimmick to retailers but as Oman has only two VAT rates 5% and 0%, there will not be many complication as in case of pick-n-mix bundle offer prevalent in other sales tax regimes around the globe with multiple tax rates over products. According to Aastha Rangan, retailers should start looking into various sales and marketing scenarios and analyse the VAT implementation challenges surfacing the VAT regime.

In the case of ‘free gifts’ offered by retailers like shop worth RO 20 and get a pack of 10 masks free, the question is how will the free item be treated for VAT purpose. The Executive Regulation will most likely exempt low value items from being treated as deemed supply. However, anything above the stated limit with be subject to VAT. That means VAT is not collected from the customer as the items is given for free but VAT liability exists for the retailer and is to be paid to the Tax Authorities. This is something which should alert retailer as to how the accounting modules will be automated to account VAT correctly for an item with zero sale price.

It is very common business practise to give free samples to customer right from luring taste buds in sweet shops or giving sample medicines by pharmacies. Whether it is a gift given in a raffle draw or discount coupon given on high value sales, or cash back offers by a third-party or bank, or free accessories with main product; it is noteworthy that retailers and businesses offering such offer and schemes will definitely have to evaluate the VAT impact on their businesses.

Big international retail-chains, hotels and airlines have loyalty programs or cards mainly to boost repetitive sales. Will those be subject to VAT? Automobile dealers offer free service and offer free accessories on vehicle sales. How the same will be treated for VAT? Many time corporates give gifts to their employees on which they have claimed input credit. What will the VAT impact on such transactions? These question should start bothering the business houses as the VAT implementation date is way to close with very short time for VAT impact assessment.

Disclaimer- All above will be answerable once executive regulation is published by Tax Authority.