VAT UAE is considered as a general consumption or final consumer tax which is imposed on most of the transactions of goods and services until any particular commodity is exempted by the law.
As per the above line, VAT is levied at every stage of ‘Value Addition’ in the supply chain and the mechanism of Input Tax Deduction guarantees that the companies act as a tax collector or tax agents of the government, who collects the tax from the final consumers, account and pay the tax. Finally, the tax is paid by the final consumer.
As the paid tax on inward supply of goods and services is given as input credit to the tax liable person to ensure the tax component is only a value addition.
Table of Contents
- Important points for consideration:
- Process for Adjusting the Output Tax
- Process for adjusting the output tax in the case on Bad debts
- Input Tax
- How can a person claim Input Tax for goods which is obtained in another GCC
- Conditions which are to be satisfied are:
- Non-Recoverable Blocked/Input Tax Credits
- Adjustment of ITC towards Output tax payable
- Recovery of input tax paid before registration
- Procedure and due date for Payment of Payable Tax
- Article (22) of Tax Procedures
Important points for consideration:
1. Payable Tax: Tax which is due for payment to the Authority.
i.e. Payable Tax = Output Tax – Recoverable Tax
2. Output Tax: Tax which is charged on a Taxable Supply and any supply which is considered as Taxable Supply is Output Tax.
3. Input Tax: Tax or due paid by a person when Goods or Services are supplied to him, or when conducting an Import.
4. Recoverable Tax: The paid-up amount which has been returned by the tax authority to the taxpayer according to the provisions of Decree-law in accordance with some conditions.
It has been understood that what Output Tax is. Now, the question arises that does the law permits the registered person to change or update the Output Tax that was once charged on Tax Invoice?
The answer to this question is- Yes. Article (61) of Decree-Law gives the example/ scenarios where an adjustment of Output can be done. Given below are the illustrations in which the registered person can make an adjustment to the Output Tax on supply after the date of supply:
a. If the supply was cancelled.
b. If the Tax treatment of the supply changes due to the change in the nature of supply.
c. If the formerly agreed consideration for the supply was changed for any reason.
d. If the Recipient of Goods or Services returned them to the Registrant fully or in part and the consideration was returned fully or in part.
e. If the tax was levied in any mistake.
If any of the events which are stated above occurs then the output VAT formerly computed requires an adjustment. The adjustment of Tax can result in a decrease or increase in output VAT.
Given below are the conditions for adjusting the output tax amount which is charged in the invoice
If any of the conditions which are given below are met then only the supplier will be permitted to adjust the output VAT on the occurrence of any of the events discussed above:
a. If the Output Tax charged in the Tax invoice does not match the Actual Tax then that must be charged due to any of the examples listed above; or
b. If a tax return has been submitted by the registered person of the particular tax period of the supply duration and the calculated amount is assumed as output tax.
Process for Adjusting the Output Tax
a. If in case, actual tax due is more than the formerly imposed, then when such increase is identified, a new tax invoice for the extra amount must be issued during the period. This will be applicable in all the situation which will maximize the output VAT like a change in tax treatment (exempt to taxable), escalation of price (an upward revision of price), error in charging tax in the invoice etc.
b. If in case, the actual tax due is less than what was formerly imposed, then for the differential amount, a tax credit note should be issued which will minimize the output tax of the supplier and input tax of the recipient. For instance: cancellation of supply, the return of goods, etc.
Process for adjusting the output tax in the case on Bad debts
Given below are the condition by which the supplier can make an adjustment of output tax in case of bad debts:
A. Conditions for Supplier:
If the conditions which are given below are satisfied then the registered supplier can minimize the Output Tax in a present Tax Period to adjust the Output tax paid for any formerly Tax Period:
a. Goods and Services has been supplied and the Due Tax has been charged and paid;
b. To write off in full or part as a bad debt the consideration for supply in the supplier account
c. If more than six months have passed from the date of the supply; and
d. The supplier has informed the Recipient of Goods and Services of the amount of Consideration that has already been written.
B. Conditions for Recipient:
The registered Recipient of Goods and Services must minimize the Input Tax for the present Tax Period being claimed during any formerly Tax Period where the Consideration has not been paid and where all the following conditions are met:
a. As mentioned above, the registered supplier has minimized the Output Tax and the Recipient has received an information from the supplier about the amount of Consideration which has been written;
b. The Goods and Services were received by the Recipient and the applicable Input Tax was deducted; and
c. For more than six months, the Consideration was not paid fully or in part.
The amount of reduction by the recipient and supplier must be equal to the Tax on the Consideration which has been written.
Input Tax is defined as the tax which is paid by the registered person while purchasing Goods or Services and also on the expenses of a business. The tax might be paid by the registrant either to its supplier on goods or services supplied to it or may be paid by it under reverse charge mechanism. But, it is important to note that the only payment of tax on inward supply does not result in such tax which is in nature of the recoverable tax and the test of recoverability of input tax has been stated under Article (54) of Decree Law.
How can a person claim Input Tax for goods which is obtained in another GCC
When Goods are obtained in another GCC and then shifted into the UAE by the same person, then he can claim credit of tax paid in that country, subject to the conditions which are mentioned in the executive regulations.
Conditions which are to be satisfied are:
The VAT paid on while buying the goods and services which are used for business cause and for few conditions can be recovered by a registered business. The conditions which must be satisfied are-
A. Must Be Used To Make Taxable Supplies
Taxable supplies are the supplies on which the tax is likely to be paid (i.e. supplies made at zero-rated supplies or 5%). Only on the inputs which are used to make taxable supplies can be allowed to claim the Input VAT recovery and not the exempt supplies.
B. Recipient Gets And Keeps The Tax Invoice
The recipient who is claiming the input tax recovery on a supply must confirm that they receive the Tax Invoice involved to the supply and must be kept in the records. The Tax Invoice must show all the details of the supply which is associated with the input tax recovery which is to be claimed.
C. Recipient Pays The Remuneration For The Supply
The receiver who claims input tax recovery must pay or plan to make the payment of remuneration for the supply within a half year (6 months) after the date of supply which has been agreed for the supply.
So, the supply for input tax recovery is a very important component of VAT in UAE. Businesses must confirm the identity supplies correctly on which input tax can be retrieved, confirm that they can satisfy the conditions for claiming the input VAT recovery and also claiming it on time. This will help in the business by confirming the perfect cash flow and working capital. All the works can be made simple by using the VAT software which will automatically perform all these tasks w.r.t. ITC which will give enough time for you to focus on your business.
Moreover, no credit is present for tax paid on goods which enter the UAE for the purpose of transit to another GCC country stated in Clause (2) of Article (48) of the Decree Law. In such cases, the credit will be made available in the GCC country where the goods are finally destined.
Non-Recoverable Blocked/Input Tax Credits
Input Tax must be not available (non-recoverable) if it is suffered by a Person in respect of the following Taxable Supplies:
- The person is not considered as a Government Entity as specified in a Cabinet Decision in accordance with Article (10) and (57) of the Decree-Law and a provision of entertainment services not employed by the Person, including customers, potential customers, officials, or shareholder or other owners or investors
- Where a motor vehicle was bought, leased or rented for the purpose of Business and is now used personally by any Person.
- Where Goods or Services were bought by the employees for no charge to them and for their personal benefit which includes the provision of entertainment services, excluding the following cases:
a. Where it is a lawful duty to give those Goods or Services to those employees who are under any relevant labor law in the State or Designated Zone.
b. It is a contractual duty or documented policy.
c. Where the provision of goods or services is a deemed supply under the provision of the Decree-Law.
Adjustment of ITC towards Output tax payable
The recoverable input tax can be claimed as input credit, once it is available fulfilling the following conditions stated in Article (55) of Decree-Law:
a. The tax invoice or other duty paying document (in the case of imports) has been received and kept in the records; and
b. Consideration for the supply has been paid fully or in part.
Recovery of input tax paid before registration
The taxable person can request a credit of input tax paid after tax registration, in the first return which was submitted post registration. Such claims can be made on:
a. Supply of Goods or Services made to him after registration.
b. Import of goods by him after registration.
It is important to note that for recovery of such input tax paid before the registration of the taxable person one must conform to file return for the first tax period post registration carefully surveying all the exceptions as discussed below and use of such inward supplies. Post-filing of first tax period such recoverable tax credits could not be taken.
Below are the cases in which input credit cannot be claimed in relation to goods or services obtained before registration:
a. Receipt of goods or services for the purpose of making non-taxable supplies. It is important to note that zero-rated supplies are taxable supplies.
b. Tax credit related to part of capital assets devalued prior to the date of tax registration. If part of the asset is devalued then Input tax cannot be recovered on such assets to the extent such assets are devalued.
c. Services received more than five years before the date of tax registration.
d. Where the goods were shifted to another GCC implementing country prior to tax registration.
Procedure and due date for Payment of Payable Tax
A taxable person must file the tax returns as per the compliance while the tax authority must receive the tax returns not later than the 28th day following the end of the Tax Period concerned or other dates as directed by the Authority.
The Authorities has given three different ways of payment of the payable tax
a. e-Dirham Card: It is a prepaid card that is an integral part of an electronic payment system in the United Arab Emirates (UAE), especially in terms of payment for government service fees.
b. GIBAN: it is a unique IBAN number which is given to all taxable person by Authority and fund transfer can be made from certain UAE financial institutions.
Recommendation: The Process of Making VAT Payments in UAE using GIBAN
c. Credit Cards
Article (22) of Tax Procedures
Within twenty business days of an application being submitted, the authority must review the application and inform said Taxpayer of rejecting or accepting the refund claim. And if the Authority has a reasonable reason for requiring a longer period than twenty business days so to consider his application, he must inform the applicable taxpayer.
Where the Authority has given the permission of refund application, then within five business days of the approval it must:
a. Either make the proper payment to the Person
b. Information of authority offsetting the amount requested for refund against other payable administrative tax
c. Or inform the person that the refund will be delayed until all due Tax return are submitted to the Authority.