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Input Credit and Tax Payments under UAE VAT

Input Credit and Tax Payments under UAE VAT

VAT in UAE is a general consumption tax which will be levied on the majority of transactions of goods and services unless specifically exempted by the Law. Under this, VAT is charged at every stage of ‘Value Addition’ in the supply chain and the mechanism of Input tax deduction ensures that the businesses act as tax agents or tax collectors of the government, who collect the tax from the end consumers, account and pay the tax. Ultimately, the end consumer pays the tax. In order to ensure that tax is only on value addition, the tax paid on inward supply of goods or services is allowed as Input Credit to the taxable person and payment is required to be made only if tax on supplies made by taxable person during tax period exceeds the recoverable tax paid on inward supplies of goods or services for purpose of business

Few Important points for consideration:
  1. Payable Tax: Tax that is due for payment to the Authority.

 

In other words Payable Tax = Output Tax – Recoverable Tax

 

  1. Output Tax: Tax charged on a Taxable Supply and any supply considered as a Taxable Supply.

 

  1. Input Tax: Tax paid by a Person or due from him when Goods or Services are supplied to him, or when conducting an Import.

 

  1. Recoverable Tax: Amounts that were paid and may be returned by the Authority to the Taxpayer pursuant to the provisions of this Decree- Law, subject to fulfillment of certain conditions.

 

From the above discussion it is understood that Output Tax means Tax charged on a Taxable Supply and any supply considered as a Taxable Supply. Now the second thought which comes to or minds is that does law allow registered person to change or alter the Output Tax once charged on Tax Invoice?

 

The answer is Yes. Article (61) OF Decree Law provides for instances/scenarios where Adjustment of Output Tax can be done. The registered person can make adjustments to the Output Tax on supply after the date of supply in any of the following instances:

 

  1. If the supply was cancelled.
  2. If the Tax treatment of the supply has changed due to a change in the nature of the supply.
  3. If the previously agreed consideration for the supply was altered for any reason.
  4. If the Recipient of Goods or Services returned them to the Registrant in full or in part and the consideration was returned in full or in part.
  5. If the tax was charged in error. However there is an exception to this instance.

 

Exception: Where the place of supply was treated as supply made in the State, but due to movement of Goods, it turned out to be treated as supply to a tax registered customer in one of the Implementing States; the output tax charged shall not be adjusted on account of tax charged in error. [Article 61(2)]

 

 

 

On the occurrence of any of the events mentioned above, the output VAT previously calculated requires an adjustment. The Tax adjustment can result in increase or decrease in output VAT. In case, at the time of sale, if the place of supply was identified as inside the State and later, during movement of goods, it was found that the supply would finally be treated as being outside the State, it will not be considered as an error in charging tax in the invoice and output VAT adjustment is not allowed.

 

For example, on 15th March, 2018, Abdul Traders, located in Dubai, supplied goods to Ali Enterprises for AED 40,000 + VAT AED 2,000. On 5th April, 2018, Ali Enterprises returned goods worth AED 5,000. In the above case, Abdul Traders should make an output VAT adjustment by recording a credit note for the value of AED 5,000 + VAT AED 250. After adjustment, Abdul Trader’s output VAT liability will be AED 1,750.

 

Conditions for adjusting output tax amount charged in the invoice

The supplier will be allowed to adjust the output VAT on the occurrence of any of the events discussed above, only when any of the following conditions are met:

  1. Output Tax charged in the Tax Invoice does not match the Actual Tax that should be charged due to any of the instances mentioned above ; or

 

  1. If the Registrant submits a Tax Return for the Tax Period during which the supply occurred and an amount was incorrectly calculated as Output Tax due as a result of any of the instances mentioned above.
Manner of Adjustment of Output Tax
  1. In case the actual tax due is more than what was previously levied, a new tax invoice for additional amount should be issued during the period when such increase was identified. This will be applicable in all the situations which will lead to increase in output VAT like an escalation of price (an upward revision of price), change in tax treatment (exempt to taxable), error in charging tax in the invoice etc.
  1. In case the actual tax due is less than what was previously levied, a tax credit note should be issued for the differential amount. This will reduce the output tax of the supplier and input tax of the recipient. For example, the return of goods, cancellation of supply etc.

For Example: Mr. X had charged the tax and remitted the same to Authority. After filing the return, the following transactions took place:

  1. One invoice worth of AED 50 (with 5% rate) was cancelled and recipient returned the goods.
  2. Due to certain reasons, one invoice (with 5% rate) worth of AED 40 was increased to AED 70.
  3. It was noted that in one invoice sale value (with 5% rate) was wrongly mentioned as AED 80 instead of AED 40,

Particulars

Sales

(before

adjustment)

Sales

(after

Adjustment)

Tax (before

Adjustment)

– Charged

by X- (A)

Tax (after

Adjustment)-due for

supply-

(B)

Difference

(B-A)

Course of

action &

Treatment

Case (a)

50

2.5

(2.5)

X shall issue

Tax Credit

note & reduce

Output tax

Case (b)

40

70

2

3.5

1.5

X shall issue

new Tax

Invoice & add

to Output Tax

Case (c)

80

40

4

2

(2)

X shall issue

Tax Credit

note & reduce

Output tax

 

Manner of Adjustment of Output Tax in case of Bad Debts:

The supplier can make adjustment of tax on the Bad debts subject to the following conditions:

Conditions for Supplier:

The registered supplier can reduce the Output Tax in a current Tax Period to adjust the Output tax paid for any previous Tax Period, if all the following conditions are satisfied:

  1. Goods and Services have been supplied and the Due Tax has been charged and paid;
  2. Consideration for the supply has been written off in full or part as a bad debt in the accounts of the supplier;
  • More than six (6) months have passed from the date of the supply; and
  1. The supplier has notified the Recipient of Goods and Services of the amount of Consideration that has been written off by him.
Conditions for Recipient:

The registered Recipient of Goods or Services shall reduce the Input Tax for the current Tax Period being claimed during any previous Tax Period where the Consideration has not been paid and all of the following conditions are met:

  • The registered supplier has reduced the Output Tax as stated above and the Recipient has received a notification from the supplier about the amount of Consideration being written off;
  • The Recipient received the Goods and Services and the relevant Input Tax was deducted; and

The Consideration was not paid in full or in part for the supply for over (6) six months.

The amount of reduction by the supplier and recipient shall be equal to the Tax on the Consideration which has been written off.

Input Tax

It is the Tax paid by the registered person on the purchase of Goods or Services and also on business related expenses. The tax may 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. However, it is to be noted that merely payment of tax on inward supply does not result in such tax being in the nature of recoverable tax. The test of recoverability of input tax has to be satisfied under Article (54) of Decree Law.

How to Claim Input Tax for goods acquired in another GCC

When goods are acquired in another GCC country and then moved into the UAE by the same person, he can claim the credit of tax paid in that country, subject to conditions mentioned in the executive regulations.

Conditions to be satisfied are: [Article 52(3) of Executive Regulation]

  1. The taxable person keeps evidence that he has paid Tax in another implementing state in respect of the relevant goods.
  2. The taxable person has not recovered the tax paid in any other implementing state.
  3. The taxable person has complied with any additional reporting requirements that the Authority may specify

However No credit is available for tax paid on goods entering the UAE for the purpose of transit to another GCC country as envisaged in Clause (2) of Article (48) of the Decree Law. In such cases credit would be made available in the GCC country where the goods are finally destined.

Non-Recoverable Input Tax/ Blocked Credits

Input Tax shall be non-recoverable (not available) if it is incurred by a Person in respect of the following Taxable Supplies:

  1. Where the Person is not a Government Entity as specified in a Cabinet Decision in accordance with Article (10) and (57) of the Decree-Law, and there is provision of entertainment services to anyone not employed by the Person, including customers, potential customers, officials, or shareholder or other owners or investors.
  2. Where a motor vehicle* was purchased, rented or leased for use in the Business and is available for personal use by any Person.
  3. Where Goods or Services were purchased to be used by employees for no charge to them and for their personal benefit including the provision of entertainment services, except in the following cases:
    1. where it is a legal obligation to provide those Services or Goods to those employees under any applicable labour law in the State or Designated Zone.
    2. it is a contractual obligation or documented policy.
    3. where the provision of goods or services is a deemed supply under the provisions of the Decree-Law.

*The phrase “motor vehicle” shall mean a road vehicle which is designed or adapted for the conveyance of no more than 10 people including the driver. A motor vehicle shall exclude a truck, forklift, hoist or other similar vehicle.

* A motor vehicle shall not be treated as being available for private use if it is within any of the following categories:

  1. a taxi licensed by the competent authority within the State;
  2. a motor vehicle registered as, and used for purposes of an emergency vehicle, including by police, fire, ambulance, or similar emergency service;
  3. a vehicle which is used in a vehicle rental business where it is rented to a customer.
Adjustment of Input Tax Credit towards Output tax payable

Once the recoverable input tax is available, the same can be claimed as input credit subject to fulfillment of following conditions specified in Article (55) of Decree Law:

  1. The tax invoice or other duty paying document (in case of imports) has been received and kept in the records; and
  2. Consideration for the supply has been paid in full or part thereof.
Recovery of input tax if paid before registration (Article 56)

The taxable person can claim credit of input tax paid prior to tax registration, in the first return submitted after registration. Such claim can be made on:

  1. Supply of goods / services made to him prior to registration.
  2. Import of goods by him prior to registration.

It is imperative here that for recovery of such input tax paid earlier than registration of the taxable person one must ensure to file return for the first tax period after registration carefully analyzing all the exceptions as discussed below and use of such inward supplies. After, filing of return of first tax period such recoverable tax credits could not be taken.

In the following cases, input credit cannot be claimed in relation to goods/services acquired prior to registration:

  1. Receipt of goods / services for the purpose of making non-taxable supplies. It need to be noted that zero-rated supplies are taxable supplies)
  2. Tax credit related to part of capital assets depreciated before date of tax registration. If part of the asset is depreciated then Input tax cannot be recovered on such assets to the extent such assets are depreciated.
  3. Service received more than 5 years prior to the date of tax registration. (Here credit in relation to goods has not been restricted, thus if goods are in possession and are being used as specified in Articles (54) and (55), credit will be available).
  4. Where the goods were moved to another GCC implementing country before tax registration.
Due Date and Procedure for Payment of Payable Tax

A Tax Return must be received by the Authority not later than the 28th day following the end of the Tax Period concerned or by such other date as directed by the Authority.

A Taxable Person shall settle Payable Tax in relation to a Tax Return using the means specified by the Authority so that it is received by the Authority no later than the 28th day following the end of the Tax Period concerned or by such other date as directed by the Authority.

The Authorities have recognized three different ways of payment of payable tax

e-Dirham Card: It is a prepaid card which is an integral part of electronic payment system in United Arab Emirates (UAE), especially in terms of payment for government service fees.

GIBAN: A GIBAN is a unique IBAN number that is given to every taxable person by Authority and fund transfer can be made from certain UAE financial institutions.

Credit Cards

 Article (22) of Tax Procedures

The Authority shall, within (20) business days of an application being submitted, review the application and notify said Taxpayer of accepting or rejecting the refund claim. Where the Authority has reasonable grounds for requiring a period longer than (20) business days to consider his application, it shall notify the relevant Taxpayer thereof.

Where the Authority has approved a refund application, it shall within (5) business days of the approval,

  • Either make the appropriate payment to the Person
  • Or notify the Person that the Authority will offset the amount requested to be refunded against any other Payable Tax or Administrative Penalties due,
  • Or notify the Person that the refund will be postponed until all due Tax Returns are submitted to the Authority.

 

Disclaimer

All rights reserved. No part of this Article may be reproduced, stored in a retrieval system, or transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or otherwise without prior permission, in writing, from the author.

About Author

Author of this article is CA Deepak Bharti who is member of ICAI. Currently he is working as partner in M/s N A V & Co. Chartered Accountants, handling the Corporate Compliance and Legal Department. He can be reached at cadeepakbharti@yahoo.com. Suggestions/comments are most welcome.

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Delhi, India

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