Input tax is the tax paid by a taxable business or an individual on the purchase of goods and services on which VAT is implemented. It also includes tax paid during the imports related to taxable supplies. In UAE, the Federal Tax Authority (FTA) has laid down provisions for recovering input tax.
Under Article 54 to Article 56 of the VAT UAE Law, businesses can claim recoverable input tax. In simple terms, a VAT registered person or company in UAE is liable to recover input tax paid on the purchase of goods and services.
All you need to know about VAT Input Tax and how to recover it in UAE
In this article, we will explain everything you need to know about Input Tax and how to recover it. Recovering input tax is essential because it has a significant impact on your cash flows and expenses incurred by the business during a financial year.
Let us first understand what input tax is and how its recovery works.
What is Input Tax?
Input tax is the amount of tax paid by a buyer as a percentage of the price of goods and services used to make one final product. In UAE VAT standard rate is 5%. For example, the price of a product is AED100, as the VAT rate is 5%, then Input tax will be:
AED100 x 5% = AED 5.00
Input tax is also known as Recoverable VAT or VAT Credit. To know more about VAT and Input Tax Calculation, read “How to Calculate VAT in UAE.” To avoid any miscalculations, it is highly recommended to get the best VAT consultancy in Dubai so you can avoid administrative penalties.
What are the Conditions for Input Tax Recovery?
A VAT registered business in UAE can recover VAT paid on the purchase of goods and services used for business purposes. There are, however, certain conditions that must be satisfied to be eligible for input tax recovery. These conditions are discussed below:
Input tax is only recovered on taxable supplies
One of the most important and foremost condition is that the input tax can only be recovered on taxable supplies. Taxable supplies are supplies of goods and services on which VAT is levied (both 5% and zero-rated supplies). Therefore, input VAT recovery is allowed only on those inputs that are used to produce taxable supplies (not VAT exempt supplies).
Recipient of the input tax recovery should secure Tax invoice
Tax invoices include details of taxable supplies on which input tax recovery claims can be made. Therefore, to be able to claim recovery on these supplies, businesses MUST maintain tax invoices properly as evidence and future references.
Recipient pays consideration of supply on time
It is essential for the recovery of the input tax that the recipient/ business pays or intends to make the payment of consideration for the supply within six months, starting from the agreed date of payment for the supply.
Recipient must be VAT registered
Another important condition for the recovery of input tax is that the business claiming the recovery must be a VAT registered company in UAE. Otherwise, it cannot claim input VAT recovery.
Supplies Not Eligible for Input Tax Recovery in UAE
Under VAT Laws in UAE, businesses can claim to recover VAT amount paid on the purchase of goods and services, subject to conditions as discussed above. There are, however, certain supplies on which input tax recovery is not allowed even for VAT registered businesses.
Let us not understand the nature of these supplies.
Supplies used to make VAT Exempt Products
VAT Exempt supplies are supplies that are exempt from VAT (not taxed), such as the supply of bare land, local passenger transportation, etc. According to VAT laws, a registered business in the UAE cannot recover input tax paid on the purchase of supplies used to make these exempt products.
For example, your business purchases 10 units of item A at AED 1,000. VAT paid on the purchase of these goods at the rate of 5% is around AED 500. Now, item A is used to supply local passenger transport services in the UAE, which comes under the VAT Exempted category. Hence, your company cannot claim input tax recovery of AED 500 paid on the purchase of item A.
Entertainment provided to non-employees
Registered businesses in UAE cannot claim input tax recovery on services used to provide entertainment to non-employees. These include customers, shareholders, potential customers, owners, and investors. This entertainment includes hospitality, accommodation, food, transportation, etc.
Vehicles Used for Personal Use
If registered business purchases or rents a car for use in business, but it ends up used for personal use by the individuals, then tax paid on the purchase or rent of the car cannot be recovered. Here vehicle means a conveyance of not more than 10 people. It does not include trucks, hoists, etc.
Goods and Services Purchased for the use of Employees
A registered business cannot claim tax input tax recovery paid on services for the use of employees. For example, a company purchases gym equipment for the use of its employees as part of their employee benefit. In such cases, VAT paid on the purchase of gym equipment cannot be recovered.
It is highly recommended that businesses should consider the best VAT consultancy in Dubai to help them categorize their expenses on supplies. This way companies can make sure which VAT can be recovered and otherwise to avoid mistakes leading to hefty penalties.
Get VAT Consultancy to Avoid Penalties
VAT registered businesses in the UAE must be very careful to note supplies on which input tax is recoverable and those on which recovery is not allowed. Therefore, consult a VAT expert to make sure the input tax is recovered only on supplies that are eligible for VAT recovery.
Businesses need to ensure that they have correctly identified supplies to increase cash flow and avoid administrative penalties.