The UAE offers businesses worldwide many opportunities to achieve the next phase of growth and achieve success. The Government supports the enterprising individuals and global companies alike by providing them world-class infrastructure, cutting down red tape, unrestricted access to the global resources, skilled workforce and effective tax structure.
The tax structure in the country is simple, clearly defined, efficient and hassle-free. The UAE government does not impose any income tax and corporate tax (except on Oil companies and the branch office of foreign banks) on individuals and firms operating in the UAE. Value Added Tax (VAT) has been implemented under the Decree-law across the UAE from 1st January 2018. All the businesses are required to collect VAT from customers on behalf of the Government and make payment and submit returns by the end of the tax period.
According, all businesses should calculate the due tax, which will be filed with the tax authority. The Net VAT calculated by deducting the Input VAT from the Output VAT. The Input VAT refers to the tax paid while purchasing raw materials and related service and the Output VAT refer to the tax collected at the Point of Sale.
What is Input Tax Recovery?
As per the VAT law directive, when the Input VAT exceeds the output VAT, the businesses are entitled to a VAT refund. This refund paid by the tax authority on the input tax paid for purchasing the goods and services is known as Input Tax Recovery. A business should be a taxable entity and VAT registrant to obtain the tax recovery.
Once the tax recovery is requested, the tax authority will take twenty days to review the application and decide on the applicant's claim. The Government will notify the business if it takes more than twenty days to make the decision.
Conditions for Input Tax Recovery
- Input VAT is recovered if the purchases made are intended solely on the taxable supplies.
- Supplies and related services made outside the state which would be taxed had the same been made inside the state.
- Supplies specified by the VAT decree-law that are made outside the state would have been tax-exempt had they been made inside the state.
In recent times, the Federal Tax Authority (FTA) has made it easier for the businesses to claim the input tax recovery in the first tax period or the following tax period. The companies can reclaim their input VAT once they receive an invoice and forming an intention to make payment within six months from the agreed date of payment (post the internal approval process for invoice), which will free up the cash flow for the businesses.
Businesses not registered for VAT can claim the input tax recovery upon VAT registration on the supplies made before the tax registration. They will be eligible to recover the vat paid on goods and services purchased before the VAT registration subject to rules and regulations under the VAT decree-law.
Overhead Input Tax
The input tax paid when the goods and services purchased are partly used for recoverable supplies and partially used for non-recoverable supplies is known as Overhead/Residual Input Tax. In the case of the Overhead input tax, only the recoverable supplies are recovered in the tax period.
Blocked Input Tax
The input tax is incurred on the goods and services considered as blocked from reclaim under the VAT decree-law. Input tax on entertainment, employee-related and other personal expenses and goods used to make tax-exempt supplies fall under Blocked Input Tax category.
Special Cases for Input Tax Recovery
There are special cases where the input tax is recovered are:
- Input tax is recovered on materials & services used in new House construction for the sole purpose of residence for the person or his family.
- Foreign business visitors are allowed to recover the tax paid on business expenses in the UAE because that person should not be a resident of the state. The claim is made only on recoverable tax goods.
- Tourists can claim the Tax Refund on purchases made in the UAE subject to that they don't stay in the UAE for more than 90 days from the day of purchase and not a crew member of any flight leaving the state with implemented VAT.
- International Organisations, foreign governments bodies and diplomatic missions can claim a tax refund on the official expenses incurred in the UAE.
Here to Help!
At Jaxa Chartered Accountants, we assist our clientele across the UAE with all matters related to VAT, Internal/external audits, bookkeeping and payroll services. Our tax experts can guide businesses in the UAE regarding registration, calculation, payments and timely returns filing with the proper authorities, thereby avoiding any hassles later. Please Contact Us if you any queries related to tax in the UAE. We are happy to help.