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Treatment of Bad Debts under UAE VAT Law

What is Bad debts?


If the amount due from the customer is not paid in time and customer rejects to pay
the same it is called bad debts for the recipient. The rejection of payment by the
customer can be for any reason for example, dispute in terms of delivery of goods
or rendering services, discontinuation of business by the customer, etc.
How bad debts is related to VAT?
At the time of sales, the registered supplier charges VAT to the customer and the
amount of VAT will be shown as output vat in its vat return. This amount is
normally paid (after adjusting against the eligible input credit) to the tax
authority (FTA) in the respective VAT return period. Example if the sale value is
AED 1M the supplier will be charging AED 50,000/- as VAT. This amount AED 50,000/-
is paid to the authority in the same UAE VAT return period. Even though the
customer didn�t pay any amount, the supplier has to file the UAE VAT return and pay
the amount to the tax authority (FTA) within the due date.
If the customer does not pay, the supplier is losing AED 50,000/- in terms of VAT
along with the consideration of AED 1M. The question is whether this amount AED
50,000/- can be recovered from the Federal Tax Authority or not?
Applicability of the VAT Law on bad debts.
Article 64 of the Federal Decree Law No. (8) of 2017 on Value Added Tax in the UAE
has the provisions related to adjustment for Bad Debts. A registered supplier can
reduce the output tax on the bad debts if the following conditions are satisfied by
the supplier.
He has to write off the receivable amount as bad debts from the books of accounts.
He should notify the customer that the amount of consideration has been returned
off.
Such receivable amount should be more than six months old from the date of supply.
If all the above conditions are satisfied. The supplier can request the tax
authority (FTA) for the refund through the UAE VAT Return by way of an adjustment.

Responsibility of the customer in the case of bad debts.


The registered customer has to reduce the input tax which he has already claimed in
previous VAT return / returns.

How to disclose the VAT on bad debts in the UAE VAT Return.
In the case of supplier.
In the UAE VAT Return form (VAT 201 form) there is a column named adjustments under
the section �VAT on sales and other output 1a to 1g�. This column is used for
reducing the output tax as a result of adjustment of bad debts. The amount entered
should be only the VAT amount and should not be the sales value. This will be
always a negative figure. This amount has to be deducted from the total of output
VAT for the particular VAT Return period. Further, this adjustment amount of VAT on
bad debts should be disclosed emirates wise.

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