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A crucial element of VAT in Saudi Arabia is the availability of input VAT deduction to persons registered under VAT. This could be a new concept for taxpayers in Saudi Arabia. In this article, let us understand what is input VAT deduction and the eligibility to claim input VAT deduction under VAT in Saudi Arabia.
Input VAT deduction means the provision to deduct the value of VAT paid on inward supplies from the value of VAT payable on outward supplies. This is available to all persons registered under VAT on purchases from other registered suppliers. The availability of input VATtax deduction ensures that registered taxpayers pay VAT only on the value added by them on the goods or services supplied.
As a general rule, input tax deduction is available to all registered taxpayers on purchases from registered suppliers, which are received in the course of carrying out an economic activity. In specific, the supplies which are eligible for input tax deduction are:
Taxable supplies are eligible for input tax deduction. Note that the term ‘taxable supplies’ includes zero rated supplies. However, exempt supplies are not considered as taxable supplies.
Registrants can claim input tax deduction on taxable supplies received from registrants within KSA. In addition, in case registrants in KSA pay VAT on supplies received from registrants in other GCC States, the same is also allowed for input tax deduction.
When registrants in KSA pay VAT on imports from non-GCC States, the same is allowed as input VAT deduction. For this, it is important that the supplies should be treated as taxable supplies in KSA.
The time of claiming input tax deduction depends upon the accounting practice used by the business:
The accrual accounting method is an accounting method in which expenses and revenues are recorded when they are incurred, regardless of when cash is exchanged. If the business uses the accrual accounting method, the input VAT for each purchase will be deducted in the tax period during which an invoice is issued for the supply.
The cash accounting method is an accounting method where revenue is recorded when cash is received and expenses are recorded when cash is paid. If the business uses the cash accounting method, the input VAT for each purchase will be deducted in the tax period in which the invoice amount is paid.
Example: Ali Fahad Apparel, a registered dealer in Saudi, purchases 10 women's jeans from Jabar Clothes, a registered dealer in Saudi Arabia. The invoice for this supply is received by Ali Fahad Apparel on 15th May '18 and they make payment for the same on 10th June '18.
Here, if Ali Fahad Apparel follows the accrual accounting method, they will record the invoice in their books on 15th May ‘18 and input tax deduction can be claimed for the tax period of May ’18. On the other hand, if Ali Fahad Apparel follows the cash accounting method, they will record the transaction in their books on the date of payment i.e. 10th June '18. They can claim input tax deduction on the supply for the tax period of June ’18.
Note: The maximum time period for claiming input tax deduction on a supply is 5 calendar years after the calendar year in which the supply takes place.
Hence, input tax VAT deduction is a very important benefit that registered taxpayers should be aware of. The supplies which are eligible for input tax VAT deduction and the time when input tax deduction should be claimed have been laid down. In our next article, we will learn about the supplies which are not eligible for input tax VAT deduction.