In the recent past years, there has been a visible increase in the businesses which are being set up all around the world. This is because of many factors such as ease of setting business, easy transportation and communication between various places. This has helped in the increasing numbers of businesses which are set up all over the world.
In addition to taxes in the United Arab Emirates is the Value Added Tax, the understanding of which can make a huge difference in the revenue stream of the business. A businessman needs to understand how VAT can affect the profitability of the business. One of the parts to understand is Recoverable Input VAT.
In this article, we will explain what Recoverable Input VAT in the United Arab Emirates is and how it can assist a businessman.
What is Recoverable Input Value Added Tax?
In order to understand Recoverable Input VAT, we must understand what one means by input VAT. Input VAT can be defined as the total Taxable amount which is paid by a person or which is owed to a person when he or she is receiving a supplied goods or service or if the person is importing a good or service.
This means that if a person of entity is importing a good or service or is receiving the goods or services then some tax is either owed to the person or the person is eligible to pay some amount as tax.
According to article 55 of the Federal Decree-Law on Value Added Tax in the United Arab Emirates, Recoverable Input VAT can be claimed by a table person under the following circumstances:
- The taxable entity pays the supply of the goods or services or any part of the goods or services which are supplied.
- If the person is able to present the tax invoice which has been received and also meets the requirements as mentioned in Article 59 of the Executive Regulation.
According to the Executive Regulation of the Vat Decree, a person will be considered to have made the payment if the person intends to make the payment six months pass after the agreed date of supply is made.
How is Input Recovery Tax calculated?
The complete process of Input Tax Recovery is shown in the following example.
Let us suppose that the company XYZ acquires 20 washing machines for AED 500 each. This brings the total to 500*20 = AED 10,000. The vat applicable on the total is 5% (AED 500).
In the same month, it sells 10 washing machines for AED 700 each. This brings the total to 700*10 = 7000. VAT is collected by the company at 5% so the total VAT collected is AED 2000.
Here the by the company is AED 2000 whereas the input tax recoverable is AED 500.
Furthermore, we can calculate the total taxable amount = Output tax – Input tax recoverable
= 2000 – 500 = AED 1,500
Public Clarification regarding input Vat recovery in UAE
The government of the United Arab Emirates recently issued a clarification regarding VAT in the country. According to the clarification if a taxable person intends to claim recoverable input vat then he should fulfil the following conditions:
- The person should have an intention to make the payment for the goods or service to the supplier within six months of the agreed payment date.
- The person or the taxable entity must receive a tax invoice from the supplier.
This means that only the possession of the tax invoice will not make the taxable entity eligible for claiming the Recoverable Input Vat. The person also needs to fulfil the above mentioned two conditions.
This shows that the management of the business should have complete knowledge of the Value Added Tax in the jurisdiction. To get a better understanding, the management should avail the services of professionals who will explain the working of VAT in detail. This will help the growth of the business.
You can take the assistance of the professionals at JAXA Chartered Accountants in the UAE. JAXA also provides many other services such as Accounting, Auditing, Vat and Tax related services. For more details on the services feel free to Contact Us. We will be happy to help.