All About Input VAT Deduction in KSA

Claiming an input tax credit requires accurate implementation of rules and careful consideration of the allowable tax credit. This article will discuss everything about the input Value Added Tax (VAT) deduction, including types, eligibility, restrictions, timing, and documents required to claim the input tax credit.

Types of input VAT in KSA

ZATCA guidelines on the input VAT deduction provide three broad categories of input VAT on which a taxpayer can claim a tax credit. Below are the types of input VAT in KSA. 

Input VAT on taxable supplies

Taxpayers can claim an input tax deduction on all the taxable supplies, including zero-rated supplies. It means if you have paid VAT on your purchase of taxable goods or services in KSA, you can use such tax as deduction while paying your output tax payable on the sale of goods or services.

Input VAT on self-accounted goods/services (reverse charged VAT)

When a taxpayer in KSA buys goods/services from a non-resident supplier in KSA, the buyer pays the self-assessed VAT on such internal supplies. Under the reverse charge mechanism, the recipient of the goods/services pays the input VAT in KSA.

The reverse charged VAT is deductible in full as an input VAT in KSA if,

• Taxpayers use it to make a taxable supply for carrying out economic activities, and
• Goods or services are received in KSA, and 
• Taxpayers must report the reverse charged VAT in field 9 of the VAT return form.   

Input VAT on imports outside Gulf Cooperation Council (GCC) states

The input VAT deduction is also available on imports of taxable supplies from non-GCC states. As per the input VAT KSA guidelines, the tax credit is available on imports of zero-rated and standard-rated supplies. Hence, VAT paid on the import of exempted goods is not allowable as an input VAT deduction.

Eligibility for the input VAT deduction

The requirement to claim input VAT deduction in full requires the taxpayers to use the purchased goods/services to perform economic activities to make taxable supplies. 

Any cost or overheads incurred in the business that is not separately identified as related to taxable or exempt supplies, then such costs or overheads are called ‘non-attributable costs.’

The taxpayer will have to apportion the input credit relating to the non-attributable costs in the proportion of taxable and exempt supplies made.

Let us understand the deduction of input VAT KSA considering various scenarios as follows:

Restrictions on input VAT deduction 

The ZATCA has extensively provided a list of supplies on which a taxpayer cannot claim input VAT deduction. Listed below are supplies on which input VAT in KSA is not deductible:

1. Goods/services used for private purposes. 
2. Supply of any type of entertainment, sporting, or cultural services.
3. Catering services provided in restaurants, hotels, and similar places.
4. Purchase/lease of restricted motor vehicles. However, taxpayers can claim input VAT deduction on vehicles designed to be used on the road and used for the below scenarios:
   1. Used by the taxable person or his employees for work 
   2. Intended for resale
   3. Used in the course of economic activity
5. Repair, maintenance, or any modification of such restricted motor vehicles
6. Fuel consumed in restricted motor vehicles
7. Supply of prohibited goods by KSA Law
8. General overheads and other non-attributable costs related to exempt supplies or non-economic activities

When to claim input VAT?

The time to claim input VAT deduction depends on which accounting method is used to record accounting entries. 

Accrual-based Accounting

Accrual-based accounting records income and expenditure when they accrue. In this case, the taxpayer can claim the input VAT deduction in the same tax period of the supply (purchase of goods/service). 

Cash-based Accounting

In cash-based accounting, the income and expenditure are recorded when the cash payment or receipt is made. In that case, the taxpayer can claim the input VAT deduction in the tax period in which the cash is paid for the purchase of goods/services. 

Any remaining input VAT deduction is carried forward to the next tax period, and it is adjusted against the tax payable of the following tax period. However, if the input VAT deduction balance remains, you can claim it as a refund. It is important to remember that you can claim the tax credit until five years from the year the taxable supply was made.

Documents required for the input VAT deduction

Input VAT deduction is not allowable if necessary documents are not in place. Hence, the taxpayer is required to keep the below-mentioned documents to claim the input tax credit. 

• VAT tax invoice
• Requisite customs document that proves that the taxpayer imported goods complying with the Common Customs Law.

The recipient of the goods or services is required to retain the tax invoice as prescribed by ZATCA.

Alternative Documentation

The implementing regulations also prescribed that if the taxpayer cannot keep the above documents, he can provide the other documents as mentioned below:

• Simplified tax invoice
• For transfer of goods to another member state, any other commercial document presenting VAT calculated on the transfer date.
• Any other commercial document permitted by ZATCA

Tax invoices in non-Arabic language

For an invoice to be considered a valid tax invoice to claim input VAT deduction, the taxpayer must provide its relevant VAT details in Arabic. 

However, suppose the tax invoice is issued in another language, and the relevant VAT details are not provided in Arabic, the Authority may allow it to claim input VAT deduction if the following conditions are met: 

1. The tax invoice met all other requirements except for the Arabic language
2. The taxpayer can produce evidence of VAT payment to the supplier in a bank statement or a receipt from the supplier
3. The taxpayer must give a certified translation of an invoice if ZATCA requests to be used during the examination or for any other reason.

The input VAT in KSA is a vast topic to understand, and it requires careful consideration of the requirements of the input VAT KSA regulations.