Input tax is the tax paid by people for purchases or imports. The main component of the UAE’s value-added tax is the provision for recovering taxes paid on inputs. This means that a person can reduce the amount of input tax that is eligible to be recovered from the tax payable, and only pay the balance as tax. This ensures that only taxes are paid on value added at all stages of the supply chain. Therefore, the input tax that is eligible for recovery plays an important role in the cash flow and operating expenses under the value-added tax.
First let us understand how input tax recovery works.
Input tax recovery process
Example: In January 2018, Jehan & Co purchased 10 desktop computers in Abu Dhabi at a price of 1,000 dirhams each. In this purchase, Jehan & Co. paid a value-added tax of 5% of 500 dirhams. In the same month, Jehan & Co. provided consumers with 20 AED 2,000 desktop computers. Jehan & Co. charges a 5% value-added tax based on the supply, in the amount of Dh2,000.
Here, the output tax payable by Jehan & Co. in January 2018 is Dh2,000.
The input tax recoverable in January 2018 is 500 dirhams
Tax payable = output tax payable-input tax recoverable
Therefore, Jehan & Co.’s tax payable in January 2018 is 2,000 dirhams (output tax payable)-500 dirhams (input tax receivable) = 1,500 dirhams.
As you can see, here, the purchase tax paid by Jehan & Co. can be used to reduce its payable tax. It is only necessary to remit the balance tax due to the government.
Input tax recovery conditions
Registered enterprises can recover the value-added tax paid when purchasing goods and services for commercial purposes if certain conditions are met. The conditions to be met are:
One kind. Should be used to make taxable supplies
Taxable supplies are called taxable supplies (that is, supplies supplied at a price of 5% or at zero tax rate). It is only allowed to claim input VAT credits for input products used to provide taxable supplies, not tax-free supplies.
For example: Jehan & Co. buys 20 units of Goods A at the price of AED 50, the value is AED 1,000. Of the 20 units purchased, 10 units are used to manufacture taxable item B, and the other 10 units are used to manufacture tax-free item C.
Therefore, Jehan & Co. can only claim input value-added tax on the value of inputs used to manufacture taxable supplies, that is, 10 units @ AED 50 used to manufacture item B, which is AED 500.
b. The recipient receives and keeps the tax receipt
Recipients who request input tax on supplies should ensure that they receive tax invoices related to the supply and keep them in their records. The tax invoice should show details of the supply related to the recovered input tax recovery.
C. The recipient pays the consideration
The receiving party requesting the recovery of input tax shall pay or intend to pay the supply price within 6 months after the agreed payment date for the supply.
Therefore, the input tax recovery reserve is an important part of the UAE VAT. Companies need to ensure that they can correctly identify the supplies on which input VAT can be recovered, ensure that they meet the requirements for input VAT recovery, and request input VAT recovery on time. This will help ensure the best cash flow and working capital in the business. Using value-added tax software can make all these tasks easier. The software will help automate every task related to input tax credits and leave enough time and resources for you to focus on your business.
Understand that the supply of input output tax inputs is not allowed.