WHEN input VAT accumulates, one recourse allowed by law is a claim for a refund. But, oftentimes, these claims are partially or totally denied. There are various reasons the claims are denied, among them failure to file the claim within the 12 months prescription period, lack of valid tax invoice, failure to keep records etc.
The question is whether a taxpayer can claim the denied input tax under the Income Tax Act (“ITA”). If the answer is yes, then taxpayers can salvage part of the cost i.e, up to 24,72 percent of the value of the denied claim.
The answer to this intriguing matter lies in both the ITA and VAT Act. Expenditure and losses are deductible under s15 (2)(a) of the Income Tax Act when incurred for purposes of taxpayer’s trade or in the production of its income exclusive of capital nature and prepaid expenditure.
It can be argued that denied input tax constitutes a loss to the taxpayer. The Black’s Law Dictionary defines the term “loss” as “an undesirable outcome of a risk, the disappearance or diminution of value, usually in an unexpected or relatively unpredictable way.”
As per section 15(2)(a) of the ITA, for a loss to be deductible it must actually be sustained or incurred by the taxpayer during the year of assessment and should not be prohibited by the ITA. Section 16 (1) (c) of the ITA specifically denies deduction of any loss compensated by insurance or other forms of indemnity.
The denied claim is deemed a loss of property incurred during the year of assessment, which is not compensated for by insurance or other forms of indemnity. The claimant suffers an actual loss as a result of such denial and the deduction of such a loss is not denied by s15 (2)(a) of the ITA.
The accounting principles also dictate that a person who is unable to recover VAT constitute the final person against which the costs of the tax passed on shall legally stop and rest.
This makes unclaimed input tax legally convertible as cost available as deduction for income tax purposes no matter the reason the claim was denied.
It may be charged to the appropriate expense account or capitalised for purposes of capital allowances. Whilst the VAT Act disallows claims for whatever, it does not take away the privilege of claiming the same for income tax purposes.
In other words, the right to claim for refund or tax credit under the VAT Act is “without prejudice to a taxpayer treating the cost as a revenue expense or capitalise it, whichever is applicable in terms of the ITA”.
Section 15 (4) of the VAT Act is also relevant to this discussion. It provides that “(4) For the purposes of subsection (3) (a) where any registered operator is entitled under subsection (3) to deduct any amount in respect of any tax period from the sum of the amounts of output tax of the registered operator which are attributable to that period, the registered operator may deduct that amount from the amount of output tax attributable to any later tax period (but not later than the end of the longer period referred to in subsection (2)(a) to the extent that it has not previously been deducted by the registered operator under that subsection”.
The word “may” as per our underlining seems to suggest that setting off of input tax against output tax or refund are some of the routes among the many options available to the taxpayer.
Although the VAT Act has stated that input tax is recovered through the application for refund or tax credit, it does not prohibit its recovery outside the VAT Act. The use of other options to recover denied input tax claim is therefore not categorically prohibited.
Moreover, there is no breaking of any law or rule when a taxpayer recovers denied VAT as an expense or a loss under ITA. Doing so means that it has opted not to fully recover its excess input tax to the extent that such input tax has not been applied against its output tax.
It is our view therefore a taxpayer may resort to other modes not categorically prohibited by any law or rule, and which are based on sound accounting principles and procedures to claim its denied input tax.
Last but not least, in seeking a refund of excess or unutilised input VAT, a taxpayer must satisfy certain requirements, among them the possession of valid tax invoice and maintenance of records. Any failure to comply with these requirements may result in denial of the claim. From an income tax perspective however, deductions are allowed generally if they are substantiated with “sufficient evidence” such as official receipts and “other adequate records.”
There is deprivation under the VAT Act for failure to produce valid document or claiming the VAT within the prescription etc, but the same does not apply under the ITA.
Meanwhile, the old practice as outlined in the Zimra Income Tax handbook, page 76 allowed for deduction of sales tax — “being a tax on turnover and not on income”.
VAT, which replaced sales tax in 2004, stands on the same footing with its predecessor and should be deducted on the same basis.
In conclusion, it is our appeal to the tax authority to give proper guidance on the correct treatment of denied claims for refund. The claiming of denied input tax claim can help stimulate economic growth, which can also beneficial to the fiscus.
The counter argument though is that prompting deduction under income tax of denied input tax forestalls the spirit of complying with the VAT Act, as taxpayers will neglect the maintenance of valid tax invoices, which are also a checking mechanism by the tax authority on the lawfulness of taxpayers’ affairs.
Meanwhile, Matrix Tax School invites you to take part in the Accounting for Tax in Financial Statements course. The course commences on August 18, 2021 and is for a duration of four weeks.
Tapera is the founder of Tax Matrix (Pvt) Ltd and CEO of Matrix Tax School. He writes in his personal capacity.