Valuation of supply when consideration is not in money
In a business scenario, where price is not a sole consideration for supply i.e. consideration is either fully or partially on non-monetary terms, the value of supply should be arrived at as per the guidelines provided in the UAE VAT Law. In this article, we will be discussing the valuation of supply of goods or services where the consideration is not wholly in money.
To know how to determine the value of supply when consideration is entirely monetary, please read "How to Determine Value of Supply" .
Let us understand more about what is a consideration for supply not in money.
Let us go back to the early days of our civilization where trading was done for the exchange of goods known as ‘Barter System’. Under this system, people exchanged goods or /and services for other goods or/and services in return, without any consideration in money. Today the century-old system of barter has comeback with an improvised technique called "Exchange Offer". Under this scheme, goods are sold in return for a consideration partially in money and exchange of old goods. For example, a television is sold for 25,000 AED along with the exchange of an old television.
If you assume, that AED 25,000 is the value of the supply as per the above example, you will be in trouble and it may potentially lead to litigation. This is because, AED 25,000 is a partial price received as consideration for the supply of television and it is not the sole price which is required for arriving at the value of the supply amount. Hence, for such type of supplies, the value of supply should be derived by applying the following metric:
Monetary Value + Market value of Non-Monetary portion = Value of Supply
From the above formula, it is clear that for determining the value of supply, you need to arrive at the market value of non-monetary portion. But how do you arrive at the market value? Again, the UAE VAT law has provided the following guidelines for determining the market value:
- 1. The market value of a supply of Goods or Services on a given date is the consideration in money which that supply (non-monetary product or service) would generally achieve if supplied in similar circumstances at that date in the State, made between persons who are not related in any manner.
For example, let us consider an example of television. A television is supplied for AED 25,000 along with the exchange of an old television. The value of old television, if supplied will fetch 5,000 AED.
In such a case, the taxable value will be the sum total of consideration received in money plus monetary value of product or services received as consideration. Hence, the taxable value of supply of television will be:
Consideration in Money AED 25,000 + Monetary Value of old television AED 5,000 = AED 30,000
- 2. For some reason, If the market value of a supply of Goods or Services on a given date cannot be determined as mentioned in point no 1, the market value is the consideration in money, which a similar supply would achieve if supplied in similar circumstances on that date in the State, being a supply made between persons who are not related in any manner. Here, similar supply in relation to a supply of Goods or Services, means any other supply of Goods or Services that, in respect of the characteristics, quality, quantity, functional components, materials, and reputation, closely or substantially resembles that supply of Goods or Services.
For example, a television is supplied for AED 25,000 along with the exchange of an old television. Let us assume the market value of old television is not available. In this case, to determine the value of the old television, you need to compare it with the similar product.
Innovative Solutions have a similar product which is being sold at AED 10,000. Hence, the value of the supply will be arrived at considering AED 10,000.
Consideration in Money AED 25,000 + Monetary Value of old television AED 10,000 = AED 35,000
If for any reason, the market value cannot be determined by applying the metrics as discussed above, the market value should be determined by reference to the replacement cost of identical goods or services of such supply being offered by a supplier who is not connected to the recipient of Goods or recipient of Services in any manner.