Is there 5% VAT on Labour Camps?

Scenario

Landlord is providing furnished labour camps i.e. including the cleaning services. However, it is not a serviced hotel apartment. Should landlord charge VAT on this supply of labour accommodation?

Analysis

The labour camp accommodation is an exempt supply and must not be subject to VAT.

What we see here is that the landlord is also supplying furnishing services along with the labour accommodation, all such furnishing services falls under the category of taxable supply. However, to make such furnishing activities taxable, they should be separately billed; which in this case is not happening. The agreement is for accommodation plus furnishing services. And in this case, the major portion of this agreement is for labour accommodation and not for providing furnishing services. Hence this will fall under the concept of Composite Supply i.e. article 4 – Supply of more than one component. We have reproduced the article below for your reference.ote.

  1. Where a Person made a supply consisting of more than one component for one price, the Person shall determine whether the supply constitutes a single composite supply or multiple supplies.
  2. The phrase “single composite supply” means a supply of Goods or Services, where there is more than one component to the supply, and taking into account the contract and the wider circumstance of the supply.
  3. A single composite supply shall exist in the following cases:
  1. Where there is supply of all of the following:
  1. A principal component.
  2. A component or components which either are necessary or essential to the making of the supply, including incidental elements which normally accompany the supply but are not a significant part of it; or do not constitute an aim in itself, but are instead a means of better enjoying the principal supply.
  3. Where there is a supply which has two or more elements so closely linked as to form a single supply which it would be impossible or unnatural to split.
  4. A single composite supply may exist under Clause (2) of this Article if all of the following conditions are met:
  1. The price of the different components of the supply is not separately identified or charged by the supplier.
  2. All components of the supply are supplied by a single supplier;

Now if the supply falls under the article 4 of VAT Executive Regulations i.e supply of more than one component, then we have to see that how it will be taxed. For this purpose, we have to go through article 46 of Executive Regulations. This article clearly states that for any supply that is composite and contains more than 1 component as per article 4 will be taxed as per the tax treatment of the principal component. We have reproduced the article 46 below.

Article (46)

Tax on Supplies of More Than One Component
For the purposes of the supply consisting of more than one component:

  1. Where a supply is a single composite supply as provided in Article (4) of this Decision, the Tax treatment of the supply shall follow the Tax treatment of the principal component of the supply.
  2. Where a supply consisting of multiple components is not a single composite supply, the supply of each component is to be treated as a separate supply.

Hence as we see that there is no separation of billing between rent of the labour camp and associated furnishing services and it is assumed that furnishing services are an integral part of rental agreement; considering that rent of residential property (in this case) labour camp is VAT exempt, hence the same treatment shall be applicable for all ancillary services.

In case landlord wants to charge your VAT on the portion of furnishing services, he must bill them separately. Furthermore, we believe, that a labour camp does not fall under services apartment category unless it is given for rental for less than six months (t&c) or the landlord has a business activity of providing services accommodation.

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