Input tax refers to the tax paid by an individual on purchases or inbound supplies. A pivotal aspect of the UAE’s Value Added Tax (VAT) system is the opportunity to recuperate the taxes paid on input transactions. This means that an individual or business can subtract the amount of input tax eligible for recovery from their tax liability, ultimately paying only the remaining tax. This mechanism ensures that taxes are levied solely on the value added at each stage within the supply chain. As a result, the extent of input tax eligible for recovery significantly impacts cash flow and operational expenses in the context of VAT.
To better understand the process of input tax recovery, let’s delve into an example:
Process of Input Tax Recovery
For instance, in January ’18, Jehan & Co. in Abu Dhabi acquired 10 desktop computers at a price of AED 1,000 each, resulting in a VAT payment of 5% or AED 500. In that same month, Jehan & Co. sold 20 desktop computers to a consumer at a cost of AED 2,000 each, collecting VAT at a rate of 5%, which equated to AED 2,000.
In this scenario, the output tax payable by Jehan & Co. for January ’18 is AED 2,000.
The input tax recoverable for January ’18 amounts to AED 500.
Hence, the calculation for tax payable is as follows:
Tax Payable can be calculated as the difference between Output Tax Payable and Input Tax Recoverable.
Consequently, the tax payable by Jehan & Co. for January ’18 equals AED 2,000 (Output Tax Payable) – AED 500 (Input Tax Recoverable), resulting in a tax liability of AED 1,500.
As evident from this example, the tax paid on purchases by Jehan & Co. can be utilized to offset their output tax, with only the remaining tax payable remitted to the government.
Conditions for Input Tax Recovery
For a registered business to recover the VAT paid on the acquisition of goods and services for business use, specific conditions must be met. These conditions include:
1. The inputs should be used to produce taxable supplies: Input VAT recovery can only be claimed for inputs used in producing taxable supplies, not for exempt supplies. For example, if Jehan & Co. purchases 20 units of Item A at AED 50, for a total of AED 1,000, and uses 10 units to manufacture Item B (a taxable supply) and 10 units to manufacture Item C (an exempt supply), they can only claim input VAT recovery for the input value used in manufacturing Item B, which amounts to AED 500.
2. The recipient must receive and retain the Tax Invoice: The recipient claiming input tax recovery must ensure they receive and maintain the Tax Invoice related to the supply, which should include details pertinent to the claimed input tax recovery.
3. The recipient must pay the consideration for the supply: To claim input tax recovery, the recipient must have paid or intend to make the payment for the supply within 6 months following the agreed payment date for that supply.
Therefore, the provision for input tax recovery constitutes a crucial element of the UAE’s VAT system. Businesses must accurately identify supplies eligible for input tax recovery, adhere to the necessary conditions for VAT recovery, and submit their claims promptly. This will facilitate optimal cash flow and working capital within their operations. Employing VAT software can streamline these processes, enabling businesses to focus their resources on their core activities.
You can also register for VAT Registration on our website: