Federal Tax Authority (FTA) has issued a long – awaited public clarification to provide guidance on the application of the VAT legislation in respect of the recovery of input tax incurred on Phones, Airtime, and packages acquired for business use.
Many businesses enter into agreements with telecommunication service providers to make mobile phones, airtime (i.e., call minutes) and data packages, available to their employees to perform their roles outside office hours or at locations away from the office and there has been uncertainty as to whether a business is entitled to recover the related input tax and, if so, what the requirements are to be entitled to input tax recovery.
Input Tax Recovery – General Rule
A taxable person may generally recover input tax paid for goods and services used (or intended to be used) for making taxable supplies.
Non- permissible Recovery of Input Tax
Article 53(1) (c) of the Executive Regulations prohibits the recovery of input tax incurred on goods or services purchased to be used by an employee for their personal benefit without any charge to the employee, unless there is a legal or contractual obligation on the employer to provide such service in order for the employee to perform their role, or it is a deemed supply.
In the clarification released by FTA recently, it seeks to provide light on the below topics and the related requirements in order to be entitled to input tax recovery:
- Recoverability of input tax on Phones, Airtime, and Packages acquired for business purposes.
- Documenting strict policies for the usage of such packages and a monitoring mechanism in place to track the usage of such packages.
- Tax Treatment for excess usage of the business
The registered businesses are entitled to recover input tax in respect of Phones, Airtime, and Packages if these costs are incurred to make further taxable supplies and the below requirements are met:
|Sr. No.||Rule for recoverability of Input VAT||Remarks|
|1.||The business is registered for VAT and acquired Phones, Airtime, and Packages in its own name, e.g., the business’ details are reflected on the tax invoices and contract with the service provider;||– The business needs to retain valid tax invoices in respect of the Phones, Airtime, and Packages acquired.
|2.||The business has a documented policy in place;||– It clearly states that the Phones, Airtime, and Packages should only be used for business purposes, and the consequences of any personal use;|
|3.||The business should have adequate control and system in place to monitor the usage of the phones, Airtime, and Packages.||– The business would be required to demonstrate that it monitors the use of Airtime, and Packages and takes appropriate action against employees who use them for personal benefit in accordance with the documented policy.
– It regularly monitors the use of Airtime and Packages and retains justification for the variances between the actual usage and the average Airtime and Packages used for the specific role of the employee business purposes.
– The business takes action against employees using Phones, Airtime, and Packages for personal use in accordance with the documented policy;
If all of the above requirements are not met, the recovery of input tax incurred in respect of Phones, Airtime, and Packages will be blocked in accordance with Article 53(1)(c) of the Executive Regulation.
If you wish to know more about this public clarification and its correct implementation for your business so as to claim the Input VAT correctly, please feel free to reach out to us for further consultation.
Please do feel free to contact us for additional information 04-325 8361, or visit the NUFCA website soon and get hold on a Free-Consultancy session with us!