Eligibility for Input Tax Deduction under Saudi VAT

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Tally Solutions, Feb-04-2020

Input tax deduction is a very important feature of Saudi VAT. It is essential that registered taxpayers claim input tax deduction on eligible supplies. In our previous article ‘Input tax deduction under VAT in KSA’, we have learnt about the provision of input tax deduction, its meaning, the supplies which are eligible for input tax deduction and the time period for claiming the same. In addition to this, it is also important to note that the claim of input tax deduction has to be based on certain mandatory documents. Further, input tax deduction has been explicitly denied for certain supplies. Let us understand these facets of input tax deduction in this article.

Which documents are required for input tax deduction?

A VAT invoice is a document to be issued by persons registered under VAT in KSA, evidencing that a taxable supply of goods or services has taken place.

Should a VAT invoice be issued for all taxable supplies?

A registered person can claim input tax deduction only on the basis of evidence showing the amount of input tax paid or payable. The documents which are required as evidence for claim of input tax deduction are:

  • Tax invoice

  • In the case of imports, the customs document proving the import of goods

Note: Goods purchased by a registered person which are lost, damaged or stolen should be reported as such in the accounting records of the taxable person, in order to support the deduction of input tax on the goods. The GAZT (General Authority of Zakat and Tax) may require further evidence to be provided in respect of these goods, including police reports and insurance claims documentation.

Supplies ineligible for input tax deduction under Saudi VAT

Certain supplies are not considered to be incurred by a taxable person in the course of carrying out an economic activity. As a result, a taxable person will not be allowed to deduct the input tax relating to such expenses. These supplies which are ineligible for input tax deduction are:

  • Any form of entertainment, sporting or cultural services

  • Catering services in hotels, restaurants and similar venues

  • The purchase or lease of 'restricted motor vehicles'

Here, a 'restricted motor vehicle' is any vehicle designed to be used on the road, which is not used exclusively for work purposes or is intended for resale.

  • Repair, alteration, maintenance or similar services on restricted motor vehicles

  • Fuel used in restricted motor vehicles

  • Any other goods or services used for a private or non-business purpose

Let us take an example to understand this.

Example: Ali Fahad Apparel, a registered dealer in KSA, organises an annual meet for its employees in a hotel, Golden Tulip, in KSA. They incur catering charges of SAR 6,000 for the event, on which VAT @ 5%, i.e. SAR 300 is incurred. Here, Ali Fahad Apparel cannot claim input tax deduction on this VAT paid and thus, it becomes a cost for the business.

An important point to note in case of the above supplies which are ineligible for input tax deduction is that if any of these supplies are directly supplied by the taxable person to another person, input tax is allowed to be deducted on these supplies.

Hence, while input tax deduction is allowed on all supplies which are incurred in the course of an economic activity, registrants should note that it is important to retain documentary evidence to justify the claim of input tax deduction. In addition, certain supplies are not considered to be incurred in the course of an economic activity and are hence, not eligible for input tax deduction. Awareness of these factors will ensure that registrants can file accurate and complete VAT returns.