one The principle of neutrality is based on the basic principles of VAT design. See what it looks like in practice.
The principle of neutrality is expressed under Article 1(2) VAT Directives Directive 2006/112, in accordance with which the principle of the common VAT system is to apply to goods and services a general consumption tax which is precisely proportional to the price of goods and services, regardless of the number of transactions which take place in the production and distribution process preceding the charge stage of that tax.
The VAT calculated from the price of the goods or services at the rate applicable to such goods or services shall be chargeable to each transaction, after deduction of the amount of tax directly incurred in the various cost components. The common VAT system shall apply up to and including the retail stage.
This principle is reflected under Article 86 Goods and Services Tax Act.
VAT neutrality is reserved for taxable persons who purchase goods and services used for taxed activities. It covers the possibility of reducing the tax due on the sale of goods and services by the tax charged on purchases and the possibility of obtaining a refund of excess input tax over the due.
The right to deduct from tax due input tax in previous marketing phases constitutes one from the basic elements of the VAT structure distinguishing it from other turnover taxes. In practice, the principle of neutrality can be set out in the following example:
The taxpayer conducts a commercial activity – sale of building materials, taxed in principle at the basic rate 23% VAT. Let's assume that the month of July was its net turnover 100,000 PLN. Therefore, the sales tax will be 23,000 PLN. At the same time, during the month of July, the taxpayer purchased the goods for the warehouse on 80,000 PLN net plus VAT charged 23% height 18,400 PLN, which means that he paid for all deliveries to his contractors 98,400 PLN gross.
In the July VAT return to 25 August the taxable person demonstrates:
- •
- 23,000 PLN tax due (shown under heading 20 declarations VAT-7)
- •
- 18,400 PLN input tax (listed under heading 46 declarations VAT-7)
The tax office will refund the difference between output tax and input tax: 23,000 PLN + (-18,400 PLN) = 4,600 PLN (reported in box 54 of the VAT-7 return).
The example shows that the larger part of the tax due was offset with the tax charged, so it did not directly burden the entrepreneur. In a situation where the value of purchases would be higher than the value of sales (reverse sales 80,000 PLN, purchase 100,000 PLN) the taxpayer would be completely exempt from the tax obligation, at the same time because the charged tax would exceed the tax due (4,600 PLN), which the taxpayer could transfer to a subsequent settlement period or whose reimbursement could be requested from the tax authorities.
Finally, it is worth noting that the principle of fiscal neutrality has been repeatedly the subject of decisions by the European Court of Justice of the European Union (formerly the European Court of Justice – ETS).
It follows from this caselaw that any restriction of that law which, by its nature, undermines neutrality, is exceptional and must have clear support in the legislation Article 167-192 VAT Directives Directive 2006/112. The principle of neutrality is the foundation of the VAT structure.
Consequently, the right of deduction cannot be regarded as a form of relief or a benefit of the taxpayer.
Author:
Marcin Kołkowicz
Tax adviser, tax consultant At Russell Bedford Poland Sp. z o.o., a graduate of the Administration, Management and Marketing of the Catholic University of Lublin named after John Paul II. The subject of tax law deals with from 2012. He gained experience in Lublin and in Warsaw tax advisory offices. Author and co-author of many tax publications, in particular for the legal and tax portal TaxFin.pl. In his career, he dealt with both direct and indirect taxation issues, with particular emphasis on VAT.