The modes of transportation that qualify for zero-rating under Article 45 of the Federal Decree-Law No. 8 of 2017 on Value Added Tax (“VAT Law”) are listed in Article 34 of Cabinet Decision No. 52 of 2017.

This article explains the definition of “public and private transportation” and its interpretation to identify the buses and trains that qualify for the zero-rated supply.

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Experts at Farahat & Co assist taxable persons in identifying the buses and trains that qualify to be supplied at zero-rated rates under such provisions.

Defining Private and Public Transportation as Per VAT Law, UAE

As per clause 3 of Article 34 of the Executive Regulations, the supply of a bus or a train that is used for the transport of 10 or more passengers is zero-rated. This requires the vehicle to be used for such transportation or to be designed or adapted for such transportation.

In this reference, a means of transportation that is used to transport all individuals without being specific to any category is termed “public transportation”.

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On the other hand, private transport has been defined as all means of transportation that a specific group of people is using.

Therefore, all means of transport that are openly available for use by any person without specifying any category are private transport and will be qualified to be supplied at zero-rated rates. If a bus or a train is available for use by a specific class of people or a specified group, it is considered private transport and will be subject to VAT at the standard rate.

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Transport service providers are advised to consult tax agents at VAT Registration UAE for any clarification on the category of VAT for their services.

Features of Public and Private Transport in the UAE for VAT Purposes

The Federal Tax Authority confers guidelines that categorize a vehicle as a public or private means of transport, as depicted below:

Features of public transportation: The following factors indicate if a bus or a train is being used as public or private transport:
The vehicle has a feature that allows passengers to pay for the transport or that indicates that they have bought a ticket for the same. As an example, if a payment booth is available, there will be a ticket scanner or other device available to collect the payment.
The vehicle must have branding outside or inside that indicates that the transport is available for everyone.
The vehicle must also have the branding or mention of the regulating public transportation authority in the emirate of operation.
The vehicle has features that allow third parties to place their advertising materials on or within it.
There is proof that the mode of transportation must adhere to specified rules or requirements or that payment is necessary before being authorized for use in passenger transportation, for a specific test specified by the body in charge of regulating public transportation in the emirate of operation.
The means of transport is intended to be used for the transportation of all individuals without specifying any group.

Private transportation based on the aforesaid, the following means of transport are not considered to be used for public transportation:

School busses
Busses are used for the transportation of groups of employees and workers to their workplaces.
Shuttle buses are used for transporting travelers and hotel guests to other places like the airport, sightseeing, parks, and tourist attractions.

This is because the use of the above types of transportation is specified for a specific group of people rather than the general public.

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VAT Liability of the Transportation Services

The international transit of people and products that originates or finishes in the UAE or goes through the UAE is zero-rated, according to Article 45 of the VAT Law. Therefore, subject to the standard input tax recovery requirements, any VAT incurred on expenses directly associated with the provision of such foreign transport services should be fully recoverable.
Clause 4 of Article 46 of the VAT Law states that any supply of local passenger transport will be exempt from VAT. Here, the supply must be of local passengers within the UAE, and the qualifying means of transport are land, air, or water.
For the exemption, a motor vehicle that is constructed or modified for the transportation of passengers qualifies as one of the stated qualifying methods of transportation. This includes taxis, buses, trains, trams, monorails, and other similar vehicles.
Given that the only requirement for a vehicle to qualify as a “qualifying means of transport” under Article 45 of the Executive Regulations is that it be made for passenger transportation rather than public transportation, Article 45 is to be interpreted broadly to include the transportation of any passengers, whether they belong to a defined group or not.
VAT paid on expenses directly related to the delivery of exempt local transportation services is not recoupable. Therefore, any VAT incurred on the costs of procuring the means of transportation, gasoline, etc., to offer that service is not recoverable where local transportation is made available for a fee to a designated group of persons rather than the broader public.

What Transport Supplies Are Zero-rated for VAT in the UAE?

Buses and trains that are designed and adapted to be used for mass transport of individuals are supposed to be zero-rated. But this rule is applicable without being restricted to a specific category of users.

This simply means that the means of transport that are designed to transport a specified category of people, like school-going kids and office employees, do not come under the category of zero-rated VAT. These means of transportation will be subject to standard-rated VAT.

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The VAT liability of transportation services is calculated based on whether the transportation has been provided within the UAE or outside the UAE. For all queries related to VAT rules and regulations, you can always consult tax consultants in the UAE.

Conclusion

VAT consultants in UAE are committed to assisting transport companies in identifying their transactions and categorizing them as exempt, zero-rated, or under-rated, in compliance with the VAT law, UAE.

Therefore, contact us today for all VAT quarries and we shall be glad to furnish you with expert solutions.