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.
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.
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.
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,
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.
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:
Economic Activities Related Scenarios
|Input VAT related to economic activities|
Input VAT related to
Input VAT related partially to economic and non-economic activities
Input VAT used to make taxable supply
|Fully deductible||Not deductible||The proportionate deduction that relates to economic activities|
Input VAT used to make exempted supply
|Not deductible||Not deductible||Not deductible|
All 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|
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:
The time to claim input VAT deduction depends on which accounting method is used to record accounting entries.
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).
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.
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.
The recipient of the goods or services is required to retain the tax invoice as prescribed by ZATCA.
The implementing regulations also prescribed that if the taxpayer cannot keep the above documents, he can provide the other documents as mentioned below:
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:
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.