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Change of use in Capital Goods
On acquisition of capital goods, a registered operator may claim input tax on the acquired capital goods in full, in part or is denied a deduction altogether depending on the intended usage of the capital goods. Where a registered operator had claimed input tax and the actual taxable usage of the capital goods reduces or increases from the initial intended taxable usage, a VAT adjustment should be made.
1. Reduction in the taxable use of capital goods
In terms of section 17(2) of the Value Added Tax, (Chapter 23:12), where a registered operator has acquired, manufactured, assembled, constructed or imported capital goods for the making of taxable supplies, and their application for taxable purposes is reduced from the initial taxable usage, a deemed supply of the amount of the increased non-taxable usage arises, thus an adjustment is required and the registered operator must account for output tax on the amount of the increased non-taxable use.
Value of Supply
In terms of Section 9 (8) of the VAT Act, the consideration is determined using the formula:
A x (B - C); where:
- represents the lesser of cost or open market value,
- represents the percentage taxable usage before reduction,
- represents the current percentage taxable usage of the good.
Example
In January 2024, XYZ Holdings Pvt Ltd purchased a freezit making machine valued at $2,000 including vat which was going to be used 80% taxable and 20% non- taxable and claimed input tax on that basis. By December 2024, the machine was now being used 70% taxable and 30% non-taxable. The open market value of the machine was now $1,500.
The adjustment is calculated thus, Consideration = A x (B - C) = $1,500*(80% - 70%) = $150.00. Therefore, Output tax payable = 15/115 * 150.00 = $19.57
2. Increase in the taxable use of capital goods
In terms of section 17(5) of the Value Added Tax, Chapter 23:12, where a registered operator has acquired, manufactured, assembled, constructed or imported capital goods for the making of taxable supplies, and their application for taxable purposes is increased from the initial taxable usage, an adjustment is required and the registered operator must claim additional input tax by applying the formula: A x B x (C-D); where:
- represents the tax fraction,
- represents the lesser of cost and open market value,
- represents the current taxable usage of the goods
- represents the taxable percentage prior to increase.
Example
In January 2024, XYZ Holdings Pvt Ltd purchased a freezit making machine valued at $2,000 including vat which was going to be used 80% taxable and 20% non- taxable and claimed input tax on that basis. By December 2024, the machine was now being used 95% taxable and 5% non- taxable. The open market value of the machine was now $1,500.
The adjustment is calculated thus, Input tax = A x B x (C-D) = 15/115*$1,500*(95% - 80%) = $29.35.
Time of Supply for the above-mentioned situations
In terms of Section 17 (6) of the VAT Act, any reduction or increase in the extent of the application or use of goods or services shall be deemed to take place on the last day of the registered operator’s year of assessment as defined in section two of the Taxes Act or, if the registered operator is not an income tax payer, on the last day of December.
Please note that no adjustment is necessary where the cost of capital goods excluding VAT is less than $60.00 and where reduction or increase is not more than 10%.
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