Business News

UAE makes Input Tax recovery easy for companies

Dubai: Tax payers in the UAE now recover the input tax component of their Value Added Tax (VAT) obligations in an extended time frame making it easier for companies in claiming input tax, according to a recent clarification from the Federal Tax Authority (FTA).

In a recent statement the FTA said that companies can recover their input tax within the first tax period or the following tax period after receiving in invoice and forming an intention to pay for the supply.

Tax consultants said this will significantly free up the cash flows of companies that previously were not able to meet the conditions within the prescribed time frame.

“This is a significant change for companies that had to forgo input tax recovery because they could not meet the conditions of tax refund within the prescribed time frame,” said Pankaj S. Jain, a chartered accountant and a tax expert.

In a new public clarification on the conditions relating to the recovery of input tax, the FTA has said that the in input tax can be recovered in the first tax period or the subsequent, if two conditions are satisfied.

Easy conditions

The input VAT credit could be recovered in the tax period (monthly or quarterly) in which following two conditions are satisfied for the first time, or in the immediately following tax period.

The two conditions are: The tax invoice is received; and an intention to make the payment for the supply before the expiration of six months after the agreed date of payment is formed.

“It has always been a debatable issue as to when does Condition-2 is satisfied. In other words, whether the intention to pay the invoice crystallise as soon as the tax invoice is received? Taxpayers used to consider that Condition-2 is satisfied as soon as the invoice is received. As the invoice approval process in an organisation could take few weeks/months by which time the two tax periods since receiving the invoices would get lapsed,” said Jain.

What is input tax?
Input tax is the tax paid by a person on purchases of inward supplies. A major element of VAT in UAE is the provision to recover the tax paid on inputs. This means that a person can reduce the value of input tax eligible for recovery from the tax payable and only pay the balance amount as tax. This ensures that tax is paid only on the value added at each stage in the supply chain. Hence, the amount of input tax eligible for recovery plays an important role in the cash flow and operating expenses under VAT.

FTA has now clarified that an intention to make the payment is formed only upon the completion of the internal approval process for the invoice.

“This clarification is a big relief for the taxpayers as it provides an extended time frame to recover input tax credit. With the FTA clarification, the two tax periods to recover input VAT credit will not start not from receiving the invoice but only after the internal approval process for the invoice is completed. Accordingly, the time taken for approving the invoice will not impact the taxpayer’s right to recover input tax credit,” said Jain.

The FTA statement also clarifies that if a taxable person fails to make the payment of consideration before the expiration of six months after the agreed date of payment, the taxable person should reduce the input tax in the VAT Return of the tax period following the expiry of the six-month period. However, once the payment is made, the taxable person will again be entitled to recover the input tax.