In the UAE VAT, input VAT is allowed to be charged on all goods and services used or intended for commercial purposes, except for the notified input or input services listed under the frozen credit list. To learn about freezing credits, read about supplies in the UAE that are not eligible for input tax recovery under VAT. If goods and services are used to provide duty-free supplies or for non-commercial purposes, input VAT recovery is not allowed and should be treated as expenditure.

Depending on the purpose of the goods and services-whether for the manufacture of taxable supplies or for non-commercial purposes or tax-free supplies, you must recover the input VAT accordingly. In the VAT refund form 201, you only need to report the value of the input VAT that you are eligible to recover. Although you only need to report the combined amount of input VAT recovery, internally, you may have to identify each inward supply (purchase/expense) to determine whether the goods and/or services are used to make taxable supplies or exempt supplies​​ , Or for non-commercial purposes.

In most cases, you will be able to determine whether the goods or services are used to provide taxable supplies or tax-free supplies, or for non-commercial purposes, so you can determine the amount of input VAT recovered. However, in some cases, whether the input tax paid on the purchased goods and services is different from the dutiable goods or the duty-free goods cannot be determined separately. In this case, you need to obtain the recoverable input VAT based on the input VAT allocation criteria provided in the UAE VAT Implementation Regulations.

Input tax apportionment

The distribution of input tax needs to be applied in business situations, where goods and services are used for taxable supplies, tax-free supplies, and non-commercial purposes, but you cannot separately identify whether it is related to taxable supplies or tax-free consumables.

In this case, you need to determine the entered VAT recoverable percentage by applying the following method:

1. Divide taxable consumables by total consumables (recyclable consumables + non-recyclable consumables).

2. The percentage obtained above should be multiplied by the input value-added tax (not separately identifiable) to get the recoverable part.

In short, by applying the formula given below, you can arrive at a recoverable input VAT:

Net taxable supplies x input tax paid/total supplies

Let us understand the distribution of input tax through an example.

The following are the sales transactions of M/S Abdul LLP:

Consumable type value (AED) output value- added tax (AED)

Standard rated consumables 70,000  3,500

Zero interest rate supplies 10,000   –

Exempt supplies 20,000   –

Total 100,000 3,500

During this period, the purchase/cost of manufacturing consumables is 60,000 dirhams + 5% VAT, for a total of 3,000 dirhams. M / s Abdul LLP has used the goods to make dutiable and duty-free goods, and cannot separately identify the input VAT related to the dutiable and duty-free goods.

Now, in order to determine the input VAT recovery amount, M / s Abdul LLP should use the following formula:

Net taxable supplies x input tax paid/total supplies

Value of net taxable supplies: AED 80,000 (standard rated supply 70,000 AED + zero rated supply 10,000 AED)

Total number of consumables: Dh100,000 (sum of all consumables-standard + zero tax rate + exempt consumables)

Input VAT: AED 3,000

Enter VAT recoverable = (AED 80,000 x AED 3,000) / AED 100,000

The qualified input value-added tax that M/S Abdul LLP can recover is 2,400 AED.

In the business of providing taxable and tax-free supplies, the above formula should be clearly applied to derive the VAT input tax. In some cases, ordinary goods or services may be used to make taxable and tax-free goods, such as financial services.

related articles:-

  1. Enter the value-added tax adjustment in the VAT return 201

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