Basics of Claiming Input Tax on Capital Expenditure
by Hassan Shah
Introduction
Significant capital expenditures may often be required by businesses to maintain competitiveness and meet the market demand. If we are to take examples from the business environment in the Maldives, for certain businesses such as resorts under construction and transportation service providers, capital expenses are inevitable. However, more often than not, sufficient considerations are not given to the tax treatment of these expenses.
Claiming Input Tax on Capital Expenditures (“CAPEX”) is an extensive subject. However, over a series of three articles, I will attempt to cover key areas on claiming input tax on capital expenditures pursuant to the Goods and Services Tax Act (“GST Act”)1. First and foremost, in this article, I will look into the basics of the subject. In the next article, I will walk you through an example for the calculation of input tax on CAPEX. Finally, in the third and final article, I intend on concluding the series by looking into some practical difficulties faced in dealing with the subject matter. As a consequence, I will end my final article by leaving you with certain contentious matters for you to ponder upon.
These articles are written under the presupposition that the readers have a basic understanding of how the Goods and Services Tax (“GST”) system works in the Maldives. In any case, an overview of the GST Act of the Maldives can be found on our website using this link.
Basics
Input tax is the GST that a person registered for GST is able to claim back from MIRA. For the purposes of declaration, input tax has to be categorised as either:
- Revenue expenditure; or
- Capital expenditure
Generally speaking, registered persons may set off input tax incurred for the purpose of carrying on a taxable activity2. This means that the input tax must be related to a standard or zero-rated supply that the person provides. Note that the registered persons are not allowed to enjoy the benefit of input tax deduction, where revenue expenditure or CAPEX was incurred on providing exempted goods or services3.
In addition to the general rule, there are some specific rules that need to be taken into account when claiming input tax on capital expenditures.
The table below shows a summary of the order in which input taxes must be claimed pursuant to Section 46 of the Goods and Services Tax Regulation (“GST Regulation”)4.
Priority Level |
Amount |
Rules |
Level 1 |
Input taxes relating to revenue expenditures |
|
Level 2(low level CAPEX) |
CAPEX equal to or less than MVR 500,000 |
|
Level 3(high CAPEX project) |
CAPEX exceeding MVR 500,000 |
|
As a general rule, input tax can be deducted without any restriction, given that it relates to the business operation that generates output tax. Exceptions to this rule are triggered where the input relates to level 2 and level 3 CAPEX as indicated in the table above.
If CAPEX is equal to or less than MVR 500,000, input tax can be claimed at once, provided that the activity has sufficient output tax after deduction of input taxes relating to level 1. Where the input tax relates to a high CAPEX project (that is, level 3), the input tax benefit can be obtained over a period of 36 months, provided that the activity has sufficient remaining output tax after deduction of input taxes relating to level 1 and level 2.
It should be noted that even though your business is unable to generate sufficient output tax during the 36 month period, any unclaimed CAPEX can be carried forward to the subsequent periods pursuant to Section 46(a)(5) of the GST Regulation.
Closing
I will shorten this article with the expectation that, through the article, you have been able to form an overall understanding of some of the basic rules, such as the hierarchy to be followed when claiming input tax and the requirements related to carry forwarding unclaimed input tax balances. In the next article of this series, I will take you through the computation with the help of an example.
