A registered dealer is liable to pay input tax on every purchase for further course of business. Input Tax Recovery is a key feature of VAT reform in UAE. Under this, the UAE government has allowed registered persons (taxpayers) that they can recover the input tax paid by them on the purchases to avoid the confusion of double taxation in the supply chain.
It simply means that an individual can lessen the figures of input tax by claiming (recovery) the tax payable on inputs and he has to pay the balance amount of tax. Make sure that that tax is to be payable on each stage of the supply chain as value addition.
So, the amount of input tax recovery in UAE plays a significant role in the cash flow and operating expenses under VAT.
Firstly, let’s understand the process of input tax recovery-
Process of Input Tax Recovery
In Abu Dhabi, Vaah & Co has purchased 10 laptops in February 2018 and the price of per computer is AED 1,000.
In the similar month, Vaah & Co supplies 20 laptops to its customers at a price of AED 2,000. A 5 percent VAT has been imposed on the supplies made by Vaah & Co. on the supply which amounting AED 2,000.
Vaah & Co paid AED 2,000 as output tax for the month of January ’18
Input tax recoverable for the month of February ’18 is AED 500
For calculating the tax payable, we can put the figures in the formula
Tax payable = Output tax payable – Input Tax Recoverable
Hence, tax payable by Vaah & Co. for the month of January, ’18 is AED 2,000 (Output tax payable) – AED 500 (Input tax recoverable) = AED 1,500.
As you can see above, the input tax paid by the company will be reduced from their out tax liability, and they are required to pay only the balance tax to the government. This is how input tax works.
Input Tax Recovery Condition
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.
Recoverable Input Tax
The recoverable input tax is the tax amount that has been paid or return by the Federal Tax Authority particularly to the registered taxpayer under the VAT Reform in UAE
A registered taxpayer can claim for the input tax incurred on purchases goods and services in case of:-
- Taxable supplies
- Supplies and Services are to be made within a state
- Exempted Supplies that have been listed in the VAT Decree-Law must be made within the state
Blocked input tax
VAT refund is not available on the input tax paid on the following types of expenses:
- Employee-related expenses
- Entertainment expenses
- Supplies used to make exempt supplies
- Vehicles used for personal purposes
Useful Article: 7 Hidden Business Expenses Eligible for Input VAT Recovery
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.
Declaration Of Input Tax Credit In Vat Return Form 201
Now, a taxpayer needs to provide the following details when filing a claim for the credit of taxes in VAT Return Form 201:
- VAT registration number
- ITC balance of VAT as per last return
- Turnover details
- Date of return filing
- Details of pending forms
- Difference in amount (The rate charged at the time – Actual VAT rate on the supplies)
- Final eligible ITC on VAT