Before going to the discussion let’s understand when VAT is applicable. VAT is a tax that is imposed on import or supply of goods and services. Or in other words in order for an income VAT is applicable only when it is in return of some supply of Goods and services.
So that means the implications of VAT will arise only when there is a supply, in case there is no supply there is no VAT. Let’s understand whether Interest earned or dividends yielded are the result of any supply or otherwise.
Interest Income from Bank Deposits:
Federal Tax Authority is of the view that interest income earned by individuals or businesses is merely the result of depositing an amount of money with Banks and not as a result of supply of Goods and services. Therefore there arises no supply of Goods and services in aforesaid case. That is why the transaction falls outside the scope of VAT and is not required to be shown in the VAT Return.
Like interest income Federal Tax Authority clarified that dividend income is simply a distribution of profit as a result of someone share in a business and not as result of supply of some goods and services. Therefore dividend income also falls outside the scope of VAT and there is no requirement to report such income in the return.