What Is Input VAT Deduction? Principles and Deduction Conditions

Vũ Khôi

Author at Wotech Electronics Blog

Input value-added tax (VAT) is a type of tax that arises for virtually every business. For that reason, complying with the principles and fully meeting the requirements to deduct input VAT is always a top concern for managers.

So in which cases may a business not deduct input VAT? Let SimERP help you answer those questions in the article below.

What Is Tax Deduction?

Applied to value-added tax, tax deduction is how a business determines the amount of VAT it must pay to the state budget, based on subtracting the input VAT from the output VAT.

Specifically, when a business purchases goods or services, it is subject to VAT on those goods or services (this is input VAT). But when the business resells those goods or services, the buyer is subject to VAT calculated on the value of those goods or services (this is output VAT). At that point:

The VAT the purchasing business must pay = output VAT – input VAT

The nature of VAT is to tax the consumer of the final product or service (the end-user); the purpose of tax deduction is to ensure the same goods are not taxed twice.

What Is Input VAT Deduction?

Input VAT deduction simply means that businesses calculate VAT under the deduction method, determining the tax payable by offsetting output VAT against input VAT.

Input VAT and Output VAT

Input VAT

Input value-added tax equals the total VAT stated on invoices for purchased goods and services (including fixed assets), documents proving VAT payment on imported goods, or documents proving VAT paid on behalf of foreign entities, provided all the conditions for input VAT deduction are met under the items specified in the VAT Law and other guiding documents.

Output VAT

Output value-added tax equals the total VAT on goods and services sold as stated on the VAT invoice, determined by multiplying the taxable value of the taxable goods or services sold by the applicable VAT rate for those goods or services.

Principles of Input VAT Deduction

There are 14 principles of input VAT deduction, as follows:

Principle 1: Input VAT serving the production and trading of taxable goods and services

Input VAT on goods or services used for the production or trading of VAT-taxable goods and services is fully deductible, including non-refundable input VAT on VAT-taxable goods and services that suffered losses.

Principle 2: Input VAT on goods and services for the production and trading of both taxable and non-taxable items

Input VAT on goods or services (including fixed assets) used simultaneously for the production or trading of both VAT-taxable and non-VAT-taxable goods and services is deductible only for the portion of input VAT on the goods or services used for the production or trading of VAT-taxable items.

Principle 3: Input VAT on fixed assets, machinery, and equipment

Input VAT on fixed assets, machinery, and equipment (including input VAT on leasing such assets and VAT on other activities such as maintenance and repair) is not deductible but must instead be capitalized into the original cost of the fixed assets and treated as deductible expenses in the following cases:

• Fixed assets used exclusively for the production of weapons, defense equipment, and security matériel;

• Fixed assets, equipment, and machinery of credit institutions, enterprises engaged in reinsurance, life insurance, or securities businesses, and of medical examination and treatment facilities, or education and training institutions;

• Civil aircraft and yachts not used for business purposes, for the transport of goods or passengers, or for tourism or hotels.

Principle 4: Input VAT on goods given, gifted, donated, or used for promotions or advertising serving the production and trading of taxable goods and services

Input VAT on goods used for giving, gifting, donating, promotional, or advertising purposes, in forms that serve the production and trading of VAT-taxable goods and services, is fully deductible (regardless of whether the goods were produced by the business itself).

Principle 5: Input VAT deduction according to customs regulations

Deduct in full the VAT paid in accordance with customs regulations (except in cases of penalties for tax-evasion fraud).

Principle 6: Exceptions to input VAT deduction for goods and services whose production and trading is not subject to VAT

The following cases involve goods and services purchased for the production or trading of non-taxable goods and services, yet input VAT is still fully deductible:

• Goods and services purchased and used for the production or trading of goods and services supplied to foreign organizations and individuals, and international organizations, for humanitarian aid or non-refundable aid;

• Goods and services purchased for oil and gas exploration, prospecting, and development activities, up to the date of first extraction or first production.

Principle 7: Deduction period

Input VAT arising in a given period is deductible in that period, regardless of whether the goods are still in the warehouse or have already been used.

In case of errors: the taxpayer may declare and make supplementary deductions before the tax authority issues an inspection decision.

Principle 8: Treatment of non-deductible input VAT

Input VAT that is not deductible is treated as an expense for corporate income tax purposes or capitalized into the value of fixed assets (except for input VAT on goods or services purchased in a single transaction of VND 20 million or more without non-cash payment documents).

Principle 9: Input VAT for special-purpose units

For corporation and group head offices that do not directly conduct business activities, and their affiliated administrative and public-service units such as hospitals, clinics, institutes, and training schools, input VAT serving the operations of these units is not deductible or refundable.

Principle 10: Input VAT on goods and services used for activities not subject to tax declaration and payment

Input VAT on goods and services used for activities not subject to declaration and payment is fully deductible except in the following cases:

– Organizations and individuals producing or trading in Vietnam that purchase goods or services from foreign organizations or enterprises without a permanent establishment in Vietnam, or from foreign individuals who are non-residents of Vietnam, including:

• Repair of transport vehicles, machinery, and equipment (including materials and replacement parts);

• Advertising and marketing; trade and investment promotion; sales brokerage and the provision of services abroad;

• Training;

• Sharing of international postal and telecommunications charges between Vietnam and foreign parties, where these services are performed outside Vietnamese territory, and the leasing of transmission lines and satellite bandwidth from abroad as prescribed by law.

– Organizations and individuals not engaged in business activities who are not VAT payers when selling assets.

Principle 11: Invoices for goods and services purchased under authorization

For invoices for goods and services purchased under authorization, invoices bearing the name of the authorized organization qualify for input VAT deduction in the following cases:

• An insurance company authorizes the policyholder to repair insured property, and the repair invoice bears the policyholder's name. The company pays the policyholder the amount stated in the insurance contract; the company may then declare and deduct VAT corresponding to the insurance indemnity portion under the authorization invoice the policyholder paid. If the payment is VND 20 million or more, the insurance company must have non-cash payment documents.

• Expenses incurred before the establishment of a business, incurred on its behalf by an organization or individual authorized in writing by the founding members: the business may declare input VAT deduction under invoices bearing the name of the authorized individual or organization, and must repay the amounts advanced to that individual or organization (with bank payment likewise required for invoices of VND 20 million or more).

Principle 12: VAT deduction for assets contributed as capital

Organizations and individuals not engaged in business contribute assets as capital to a limited liability company or joint stock company (with capital contribution documents such as a capital contribution certificate and an asset handover record). In the case of newly purchased, unused assets with lawful invoices accepted by the member responsible for receiving the capital contribution: the contribution value is the price stated on the invoice (including VAT), and the company receiving the capital contribution may declare and deduct the VAT on this invoice.

Principle 13: Switching VAT calculation methods

A business establishment calculating VAT under the direct method that switches to the deduction method: may deduct VAT from the first period in which it declares and pays VAT under the deduction method.

A business establishment calculating VAT under the deduction method that switches to the direct method: any VAT not yet fully deducted is converted into a deductible expense when taxable corporate income is determined, except for VAT refunded during the period of paying tax under the deduction method.

Principle 14: Errors that disqualify input VAT deduction

In the following cases the business establishment may not deduct input VAT:

• A VAT invoice used in violation of the law, for example a VAT invoice that does not state VAT (except for cases where VAT invoices are used with the payment price already inclusive of VAT);

• Invoices that omit or incorrectly state any item such as the seller's name, address, or tax identification number;

• Forged VAT invoices or VAT payment documents, altered invoices, or fictitious invoices (with no accompanying goods or services);

• Invoices stating a value inconsistent with the actual value of the goods or services bought, sold, or exchanged.

• Input VAT on goods or services not serving business operations, or serving the production or trading of goods not subject to VAT;

• Under-declaration discovered by the time the tax authority or competent body announces an inspection or audit at the taxpayer's premises;

• Failure to provide lawful VAT invoices for the purchased goods or services, or missing VAT payment documents at the import stage or documents proving VAT paid on behalf of a foreign entity;

• No non-cash payment documents for purchased or imported goods and services of VND 20 million or more.

Conditions for Deducting Input VAT

Pursuant to Clauses 1 and 2, Article 5 of Circular 219/2014/TT-BTC of the Ministry of Finance, the conditions for deducting input VAT are as follows:

1. Having a lawful VAT invoice for the purchased goods or services, or documents proving VAT payment at the import stage, or documents proving VAT paid on behalf of a foreign entity, as prescribed by the Ministry of Finance — applying to foreign organizations and enterprises without Vietnamese legal-entity status, and foreign individuals doing business or generating income in Vietnam.

2. Having non-cash payment documents for purchased goods and services (including imported goods) of VND 20 million or more, except in cases where each import of goods and services has a value not exceeding VND 20 million; where goods and services purchased in a single transaction per invoice do not exceed VND 20 million at the VAT-inclusive price; and where the business imports goods that are gifts or presents from foreign organizations, enterprises, or individuals.

How to Deduct Input VAT

Input VAT is deducted using the formula:

VAT payable = Output VAT – Deductible input VAT

For example, Company A imports a shipment of goods worth VND 200 million with 10% VAT — so the input VAT is VND 20 million. When Company A sells that shipment for VND 250 million, the buyer must pay VAT of VND 25 million.

The VAT Company A must pay to the state budget is then: 25 – 20 = 5 million VND. That is precisely how input VAT deduction works.

Timing of Input VAT Deduction

Input VAT arising in a given month is deducted when determining the tax payable for that month, regardless of whether the goods have already been used or are still in the warehouse.

If a business discovers input VAT with invoices left undeclared and undeducted at the time of declaration, it may make a supplementary declaration and deduction. The maximum window for declaring and deducting supplementary VAT is 6 months, counted from the month the omitted invoice arose.

For example: Business establishment B has a purchase VAT invoice dated March 10, 2020. If the establishment's accountant omits this invoice when declaring tax for the March 2012 period, the latest period in which establishment B may make a supplementary declaration and deduction is the August 2020 tax period.

Conclusion

SimERP has just shared with readers the concepts, principles, and regulations on input VAT deduction, fully and accurately. We hope you have gained a solid understanding of deducting input VAT in accordance with the law.

If anything is unclear or you need support, leave a comment below this article and we will assist you as soon as possible!

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