The VAT on Transportation Services provided by Educational Institutions

According to the Federal Tax Authority, UAE, the supply of education services provided by Institutions is zero-rated subject to the conditions and criteria laid down under Article 40 of the Cabinet Decision No. 52 of 2017 on the Executive Regulations of the Federal Decree-Law No 8 of 2017 on Value Added Tax (ER). However, the VAT treatment of transportation services provided by the institutions may vary depending on multiple factors and can, therefore, be zero-rated, standard rated or exempt.

The questions to be addressed for evaluating the correct VAT treatment on the transportation services can be broadly summarized into two:

Question 1:

Is there a separate consideration charged for the services?

Analysis:

Where an institution provided transportation services to its students and charges fee for the same, this would amount to a taxable supply which is subject to VAT at the applicable rates under the Law based on the individual nature of the services provided.

However, where the institution does not make a separate charge for the transportation services, and this service is included as part of the students’ tuition fees, this would be considered as composite supply taking the same VAT treatment as the main supply, i.e. educational services and hence zero-rated

Question 2:

What is the purpose of the transportation service offered to the students?

Analysis:

To qualify as a local passenger transport for exemption from VAT, in accordance with Article 45 clause 4 of the ER –

“The transport of passengers shall not constitute a supply of local passenger transport Services where it is undertaken in the context of a pleasure trip where the manner in which the trip is held out indicates that its principal objective may reasonably be said to be sightseeing, or the enjoyment of catering services, or other forms of pleasure or entertainment.”

Therefore, only standard transport services provided by the institution such as transport between the school and student residences, field trips directly related to the curriculum of education (where transportation fee is levied from students separately) would qualify as exempt local passenger transport services.

However, where any transport services are provided in connection with excursions, sightseeing or other recreation activities, then such transportation services would be subject to VAT in UAE at the standard rate.

Implications of Exempt Transportation Services:

The educational institutions will be prohibited from recovering input VAT on expenses incurred to make free transportation services, such as expenses related to vehicle maintenance, cost of vehicle purchase, insurance, fuel etc.

In cases where vehicles used for transportation are taken on lease by the institutions, the lessor will be required to charge VAT on vehicle lease and the institutions will be prohibited from recovering the input VAT.

Article 34 clause 3 of the ER zero rates the supply of following “means of transport” –

A supply of bus or train that is designed or adapted to be used for public transportation of (10) or more passengers.”

The pertinent point to note in the above provision is that zero-rating is permitted only where the means of transport, i.e. vehicle is supplied for only ‘public transportation” and not for “local passenger transport”. In this regard, it is essential to understand the meaning of public transportation.

“Public transportation” refers to “All means of mass transportation used to transport all individuals without specifying any category”.

Therefore, this does not apply to transportation services which are restricted to specific groups of people or private individuals, under a contract. This would exclude scenarios such as transportation of employees from their office to residences, student transportation provided/facilitated by institutions, transport guests by hotels etc. and hence such restricted transportation services would fall outside the ambit “public transportation”. These would nevertheless qualify as “local passenger transport” subject to conditions specified under Article 45 of the ER.

Since transportation of students by institutions does not qualify as public transportation, the supplier of the vehicle will charge VAT, and the same would end up being a cost to the institutions.

Public Clarification – “VATP007 Public Transportation” issued by the reiterates the above matter.

Education institutions will be required to apportion input VAT on everyday expenses since they would be making mixed supplies. They may need to evaluate the application of unique methods of input apportionment to ensure correct disclosure of VAT obligations.

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