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Capital Asset Scheme Under KSA VAT Law

GST Expert
Author: CA Amlesh Gupta
Posted On: Friday 12 October 2018

Tags: Capital Asset Scheme Capital Asset Scheme VAT Capital Asset Capital Asset KSA

Capital Asset Scheme Under KSA VAT Law

Article 52 of KSA VAT Regulation

In this article, we shall cover the below mentioned point related to Input Tax Deduction on Capital Assets:

  1. Eligibility of Input Tax Deduction
  2. What is adjusted Period
  3. Under Which Scenario, Input Tax Deduction to be adjusted
  4. When to adjust Input Tax Deduction taken on Capital Assets

Capital Assets consists of Tangible Assets and Intangible Assets. Such Assets are further bifurcated to Movable Capital Assets and Immovable Capital Assets.

Now, the question will arise when to take and what shall be quantum of VAT to be taken as Input Tax Deduction since the life of the assets are spread over the years.

As per KSA VAT, Input VAT Deduction can be taken immediately on the purchase of such assets. In other words, 100% Input Tax Deduction can be taken in the year of purchase itself in-spite the life of assets is spread over the number of years. However, such Input Tax Deduction needs to be adjusted if intended use of assets is changed. Change in intended use of assets can arise on happening of below mentioned events:

  1. Disposal of Capital Assets
  2. Treatment for destroyed or stolen Capital Assets
  3. Change in usage of Capital Assets like at the time of purchase such Capital Assets are used for Taxable supplies and later on it is used for Exempt Supplies.

What is Adjustment Period

Adjusted period is those periods during which intended usage of assets are changed as mentioned above. If there is change in use of capital assets, Input Tax Deductions to be adjusted as a based to ensure that Credit is taken on pro-rata basis.

As per Article 52 of KSA Regulations, Adjustment Period are mentioned below:

  1. Six years in respect of moveable tangible or intangible Capital Assets
  2. Ten years in respect of immovable Capital Assets which are permanently attached to land or Real Estate.

Starting from the date of purchase of capital assets by the taxable persons.

If the life of the Capital Asset is determined in accordance with the accounting practice of the Taxable Person be LESS than the adjustment Period, the Adjustment Period shall be the life of the Capital Asset, with any part years counting as one year.

Under Which Scenario, Input Tax Deduction to be adjusted

At the time of acquisition of Capital Asset, Input Tax shall initially be deducted in accordance with the intended use of the goods. During the Adjustment Period of the Capital Asset, there may be possibility that actual use of capital asset differs from the initial intended use. Hence, due to change in intended use of capital asset, Input Tax needs to be adjusted if the asset’s period falls within the above-mentioned adjusted period.

When to adjust Input Tax Deduction taken on Capital Assets

  1. At the end of each twelve-month period, a Taxable Person shall calculate the amount of Input Tax potentially subject to adjustment using the fraction:

 Initial Input Tax deduction / Adjustment Period

and shall make an adjustment to the amount of input tax deducted, based on the actual use of the capital asset during that year.

  1. In cases where there is no change in the use of the Capital Asset from the initial intended use in any year, the Taxable Person is not required to adjust Input Tax in respect of that Capital Asset for that year. 
  1. In cases where there is a permanent change in the use of a Capital Asset due to the sale or disposal of the Capital Asset by a Taxable Person, the Taxable Person must adjust the Input Tax deduction for the remainder of the Adjustment Period for that Capital Asset in the Tax Period in which it is sold. 
  1. No adjustment to the Input Tax deducted for the remainder of the Adjustment Period is needed if the Capital Asset is destroyed or stolen or ends its useful life earlier than accounted for. 

Case study for Capital Asset Scheme:-

Company ‘A’ purchased a movable Capital Asset on 15th January 2018 for SAR 2,000,000 and VAT thereon is SAR 100,000. Company ‘A’ has claimed the entire VAT paid on acquisition of movable Capital Asset stating that it will be used fully for Taxable Purpose.

Below are the scenario when Initial intended Use is changed:

  1. Year 1 – No Change
  2. Year 2 – 40% Capacity is used for other than taxable use
  3. Year 3 – No Change
  4. Year 4 – 50% Capacity is used for other than taxable use
  5. Year 5 – 25% Capacity used for other than taxable use
  6. Year 6 & Onwards – 100% Permanent change to other than taxable use

In the above example, adjustment is required in those periods where change in initial intended use of capital assets. Further assuming that total period for adjustment of VAT Input Deductible shall be 6 years.

In the given example, there is no change in intended use for year 1 and year 3. Hence, there will not be any adjustment in Input VAT Deductible for these two years and will be having VAT Input Deductible Adjustment in the other period which is shown in the below table:

VAT Amount Per Year:

 

   100,000

 =

  16,667

 

6

 

Adjustment Period

Intended Use

Adjustment Required

Adjusted Amount

Taxable Usage

Other than Taxable Usage

Year 1

100%

0%

No

                                -  

Year 2

60%

40%

Yes

                         6,667

Year 3

100%

0%

No

                                -  

Year 4

50%

50%

Yes

                         8,333

Year 5

75%

25%

Yes

                         4,167

Year 6

0%

100%

Yes

                       16,667

Treatment for Loss of Capital Assets or for destroyed or Stolen: In cases where there is a permanent change in the use of a Capital Asset due to the sale or disposal of the Capital Asset by a Taxable Person, the Taxable Person must adjust the Input Tax deduction for the remainder of the Adjustment Period for that Capital Asset in the Tax Period in which it is sold.

No adjustment to the Input Tax deducted for the remainder of the Adjustment Period is needed if the Capital Asset is destroyed or stolen or ends its useful life earlier than accounted for.  

Permanent Change of Intended Use of Capital Assets: In cases where there is a permanent change in use of a Capital Asset due to that Capital Asset no longer being used for the Taxable Activities of that Taxable Person, no adjustment to Input Tax is made but the Taxable Person shall be considered to make a Nominal Supply of the Capital Asset in accordance with the Agreement. The value of such Nominal Supply shall be calculated using the following formula:

(Purchase value of Capital Asset x Initial Recovery Percentage x Remaining Useful Life)/ Adjustment Period 

Where the Remaining Useful Life is the Adjustment Period determined in accordance with the above-mentioned paragraph less the number of part or full years during which the Taxable Person has used the Capital Asset, and the Initial Recovery Percentage is the recovery percentage determined in accordance with the intended use of the Goods at the time of purchase as calculated in accordance with this article.

 

Reach out on  "Whatsapp Support for Saudi VAT on +96 6547300622"   or Email  us on  amlesh@apmh.in for any further queries on the above blog.

 

 

 

 

 

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