The Zakat, Tax, and Customs Authority (ZATCA) is the tax authority in the Kingdom of Saudi Arabia (KSA) governing Value Added Tax (VAT) rules and regulations. Claiming an input tax credit on the purchases requires a nuanced understanding of the rules.
This article explains the concept of proportional input VAT credit, when you can claim it and how to claim such tax credit under the KSA VAT law.
Every taxpayer making taxable supplies can claim a full input tax credit of the goods/services purchased to perform economic activities under KSA VAT.
However, when a taxpayer makes taxable and exempt supplies or is involved in economic and non-economic activities, the input VAT cannot be claimed in full. The taxpayer cannot claim input VAT to make exempt supplies, and hence, it requires apportionment of the input tax credit.
The table below explains various scenarios related to input VAT and highlights whether a taxpayer can claim input VAT in full or partial deduction is available.
Economic Activities Related Scenarios
|Input VAT relates to economic activities||Input VAT relates to non-economic activities||Input VAT relates partially to economic and non-economic activities|
|Scenario-1Input VAT used to make taxable supply||Fully deductible||Not deductible||The proportionate deduction that relates to economic activities|
|Scenario-2Input VAT used to make exempted supply||Not deductible||Not deductible||Not deductible|
|Scenario-3All other input VAT and overheads that cannot be separately allocated||The proportionate deduction that relates to taxable supplies||Not deductible||The proportionate deduction that relates to economic activities and taxable supplies|
Taxpayers involved solely in making taxable supplies can avail full input VAT deductions. However, suppose they are involved in making taxable and exempt supplies or performing economic and non-economic activities. In that case, they will not be able to claim full input credit.
In case when the taxpayers are engaged in economic and non-economic activities or make taxable and exempt supplies, they will have to calculate the proportional input tax credit as prescribed by ZATCA.
If the taxpayer is predominantly engaged in making taxable supplies but makes small exempt supplies as part of his economic activities, and when the total non-deductible input tax in a calendar year is less than SAR 5,000, then such an adjustment can be made as a one-off adjustment in the last tax period instead of making adjustments in each tax periods.
A person who makes taxable and exempt supplies can claim only the input tax on the taxable supplies. Hence, the allowable input tax credit for the taxable supplies is the permissible input tax credit. In other words, it is proportional input VAT credit that can be claimed.
The deductible input tax available to taxable people who make both exempt and taxable supplies must be determined using the following procedure:
1. Allocate the tax amount between economic and non-economic activities. The VAT on economic activities is allowed as an input tax credit.
2. Allocate the input tax on economic activities between taxable and exempt supplies. The VAT paid to make taxable supplies will be allowed as an input tax credit.
General overheads and non-attributable costs
When taxpayers incur costs that cannot be directly separated as taxable or exempt supplies, such costs are considered general overheads or non-attributable costs.
For example, factory rent, statutory audit, electricity or water consumption costs are considered general overheads or non-attributable costs.
The input VAT deduction of such non-attributable costs must be assessed carefully, and the taxpayers must apportion the tax credit that best represents the approved methods by the ZATCA.
The business’s accounting practice, whether accrual or cash, determines the timing of claiming an input tax deduction:
The accrual accounting technique is a type of accounting that records expenses and revenues when incurred rather than when cash is paid.
If the company adopts the accrual accounting technique, you can claim the input VAT on each purchase during the tax period in which the invoice was issued.
For example, AL Amin Boutique, a licensed Saudi dealer, buys ten pairs of women’s jeans from Riza Apparels, a registered Saudi dealer. AL Amin Boutique receives the invoice for supply on the 15th of May ’21 and pays for it on the 10th of June ’21.
If AL Amin Boutique uses the accrual accounting technique, they will record the invoice in their books in May 2021, and he will claim the input tax credit in the VAT return for May 2021 or for the quarter ending on June 2021.
The cash accounting method is an accounting system that records revenue when the business receives cash and pays for expenses.
If the company employs cash accounting, you can claim the deduction of input VAT for each purchase during the month you paid the invoice amount.
For example, The Al Malla restaurant manager buys 10 kg of chickpeas every month from a registered wholesaler in Dubai. He received an invoice on 31st January 2022 with 28th February 2022 as the due date for payment. However, he paid the invoice amount on 25th February 2022.
Hence, he follows the cash accounting method. He will record the invoice in February 2022 and claim the input tax credit in the same month.
Tax incurred on goods and services received exclusively and directly attributed to taxable supplies (or other supplies which give the right to input tax recovery) is fully deductible.
However, input VAT used for making exempt supplies or performing non-economic activities is not available as a deduction. Hence, it is crucial to apportion the input tax credit between taxable and exempt supplies and economic and non-economic activities.
The apportionment of input tax credit in the case when a taxpayer is involved in economic and non-economic activities should be done using a method that clearly and fairly represents that the supplies are used for performing economic activities as the supplies used for performing non-economic activities are not eligible to claim an input tax credit.
The ZATCA requires every taxpayer to specify the amount of VAT incurred for performing economic and non-economic activities before apportioning the input VAT credit between taxable and exempt supplies.
VAT incurred for making taxable and exempt supplies will be allowed for deduction only to the extent used to make a taxable supply. A taxpayer performing all economic and non-economic and making taxable and exempt supplies will have first to apportion the input VAT between economic and non-economic and then apportion the input VAT related to economic activities into taxable, exempt supplies.
For example, Al Raul Jewelers from KSA has made the following supplies:
|Activity||Sales||Purchase||Input VAT deduction|
|Personal Use||0||SAR 250,000 |
(including input VAT of 25,000)
|No input tax credit |
|Sale to Customers||SAR 1,000,000|
(including output VAT of SAR 100,000)
(including input VAT of 30,000)
|100% input tax credit is allowable |
|Exempt Supply||SAR 400,000|
(no output VAT)
(including input VAT of SAR 3,000)
|No input tax credit|
|Non-attributable expenses related to both economic and non-economic activities||N/A||SAR 50,000|
(including input VAT of SAR 5,000)
|Need to apportion |
(refer below calculation)
Apportionment between economic and non-economic activities
Hence, the owner used 57% input tax credit for economic activities and the remaining for non-economic activities. It means he can attribute 57% of total non-attributable expenses of SAR 50,000, which will be SAR 28,500. Input VAT attributable to economic activities will be SAR 2,850 (57% of SAR 5,000).
Now, let us apportion the tax credit between taxable and exempt supply:
Thus, the owner can claim 71% of SAR 2,850 as input tax credit which will be SAR 2,023.5.
The default method is helpful when you can not apportion your tax credit because you can not separate the total supplies as taxable and exempt supplies. Hence, the default method ensures the right proportion of the input credit based on the supplies.
The formula below will help you find the deductible input tax credit percentage from the total tax paid to make taxable and exempt supplies.
Taxable supplies = Value of all taxable supplies made, all supplies that would have been taxable if made in KSA, but excluding the supply of capital assets and supplies made outside KSA from an establishment outside the KSA.
Exempt supplies = Value of all exempt supplies made, all supplies that would have been exempt if made in KSA, but excluding the supply of capital assets and supplies made outside KSA from an establishment outside the KSA.
Example: Your company made total sales of SAR 250,000 during January 2022, of which SAR 100,000 was taxable sales, whereas the remaining sales were exempt on which no output tax was paid.
You paid SAR 25,000 input tax on purchasing raw materials to make your taxable and exempt supplies. However, you cannot identify how much you used raw material for exempt supplies and how much was used for taxable supplies.
You can calculate the deductible input tax credit using the default method because you can not claim an input tax credit for the exempt supplies.
Hence, you can claim SAR 10,000 (40% of SAR 25,000) as an input tax credit. The remaining input tax credit would pertain to the exempt supplies. Thus you can not claim that as a tax credit.
Understanding the apportionment of the input tax credit is crucial when you make exempt and taxable supplies. Using the proper method will help you avoid mistakes and non-compliance from your end.