Under section 54 of the Federal Decree-Law, a taxable person may recover the VAT input tax paid during the purchases of goods or services used for business purposes. But if the goods or services are used for personal consumption, the input tax credit will not be allowed to the Assessee. Under Executive Regulation- Article 53 (1) (c ), Input tax credit on services undertaken by the employers for extending benefits to the employees is not allowed except where the employer must provide the same to the employee under any legal obligation.
Conditions for Input Tax Recovery
An example explaining Article 53(1) (c) of the Executive Regulation is the service of Mobile phones, Airtime, and data packages provided by the employer to the employee. The input tax recovery for the said service is only available when the following conditions are fulfilled:-
·The data packages, airtime, and the mobile phones provided to the employees are used exclusively for business purposes.
·If the services are used by the employees for any of their personal services, then irrespective of the cost of the goods and services, the input tax credit will not be allowed to the Assessee.
·The business is registered and has purchased the goods service in the name of the Assessee.
·The business must have the tax invoice against the purchase of such data packages, airtime, and mobile phones.
·The supply of such goods or services is deemed supply.
·The business has documented the usage policy at the time of purchasing the mobile, airtime, and the data packages and must monitor the use of such goods/services by the employees.
*Note: Backdated policies are not accepted
Issues and their related clarification
When the data packages, airtime, and the mobile phones are provided to the employees to use remotely or after office hours, the businesses fail to identify whether the services are used exclusively for business purposes or not, and hence it becomes an issue to claim the input tax credit against the same.
Therefore, the Public clarification of VAT Legislation stated that the must consider the variance between the average expected usage time of phones, data packages, airtime, and the actual time taken by the employees and must take clarification in case of excess use. The consequences for the personal usage of such services should also be designed and communicated with the employees accordingly. The Assessee is required to present such justifications and consequences to claiming the input tax credit.
To recover the input tax paid for the data packages, airtime, and mobile phones extended to the employees, the employer must ensure that the primary conditions are duly satisfied.Click here to download the file