Chetan Suri

<p><strong><u>Interest income from bank deposit</u></strong></p> <p>Bank deposits may accrue interest to their holders. For example, a retail business may put its business income into a bank account and earn interest on the deposited amount. The business does not do anything to earn this interest income other than to merely deposit the money in the account, and therefore, it can be said to be earned passively.</p> <p>In this case, <strong>the retail business does not make a supply to the bank, and therefore the interest income received is not a consideration for a supply.</strong> The retail business is not required to declare this income on its VAT return, as it is outside the scope of VAT.</p> <p>It is important to note that the above position only applies to interest derived from bank deposits and does not have any bearing to the interest generated from extending loans or credit, which are exempt supplies for VAT purposes</p> <p>&nbsp;</p> <p><strong><u>Dividend Income</u></strong></p> <p>The payment of a dividend by a company is a distribution of its profits to its shareholders. The holder of a share is, however, not entitled to a dividend until the company has declared a dividend.</p> <p>A dividend income accrues to the shareholder by merely holding shares in a company. If the company makes profits, and declares profits, the shareholder receives a dividend. The shareholder does not make any supply in order to be eligible for a payment of dividend. In other words, a dividend is generally a passive income</p> <p>As the shareholder does not make a supply to receive the dividend, the dividend income cannot be treated as consideration for a supply. Accordingly, <strong>dividend income is outside the scope of VAT, and is therefore, not required to be reported on the VAT return.</strong></p> <p>While dividend income is generally outside the scope of VAT, <strong>any amount charged as a &ldquo;management fee&rdquo; would be subject to VAT.</strong> For example, management fees charged by a holding company to its subsidiaries would be subject to VAT.</p> <p>&nbsp;</p> <p><strong><u>Donations, Grants and Sponsorships</u></strong></p> <p>&nbsp;</p> <p>A taxable person may receive payments in the nature of donations, grants and sponsorships from third parties including but not limited to employees, customers, suppliers etc. In order to determine whether such donations, grants or sponsorships are subject to VAT, one needs to identify whether such moneys can be treated as consideration against &ldquo;taxable supplies&rdquo;.</p> <p>This Public Clarification discusses the principles that must be applied to ascertain the taxability of donations, grants and sponsorships.</p> <p>The VAT treatment of donations, grants and sponsorships depends on whether the donor, grantor or sponsor, as the case may be, has received any benefit in return for such payments. <strong>Where any benefit is received in return for the payments, VAT implications will arise.</strong> However, where no benefit is received, the payments will be treated as outside the scope of VAT as they will not be seen as consideration for a supply.</p> <p>The use of the terms donation, sponsorship and grant are not in themselves determinative of the VAT treatment of the payments, and a business must consider all the facts and circumstances before arriving at a conclusion.</p> <p>&nbsp;</p> <p><strong>Source: Federal Tax Authority Guide no. VATP010, VATP011</strong></p>

VAT Updates - VATP010, VATP011