The Grounds of the Right to Credit VAT
The starting point of VAT diagnostics is the right of credit: where goods or services are intended or used for a VAT-taxable operation, the taxable person may credit the VAT paid or payable on purchase from another taxable person, the VAT payable on operations treated as supply, the VAT paid on import, and the VAT assessed under reverse charge. In addition, the VAT connected with expenses is credited where the goods or services are used for the provision of services outside the territory of Georgia, in operations exempt with the right of credit, or in defined financial services. The basis for receiving credit is a document: a tax invoice, an import declaration, or, on reverse charge, the amount reflected in the VAT declaration; in defined cases the basis is also a purchase-confirmation document of the buyer, in which the amount paid — including the VAT — must be indicated. Diagnostics is precisely the verification of these three elements — destination, document and period.
Restrictions and Correction
No credit is made on the amount of expenses for social or entertainment purposes, except where the supply within such events is taxed with VAT; likewise on goods used in operations for which the person has no right of credit; on an invoice that does not identify the seller or is not issued in the established manner; and on an invoice reflecting an operation for which 3 years have passed from the end of the calendar year. Where the credit is made in the third year after the operation, the limitation period towards the parties to that operation is extended by 1 year, and the credit is made no later than through the declaration — including a corrected declaration — of the last reporting period of the year in which the right arose. The correction rule regulates the dynamics: the taxable amount and, correspondingly, the creditable amount are corrected where the circumstances on the basis of which the taxable amount was determined at the time of the operation have changed; the correction is made in the reporting period of the occurrence of the causative circumstance. The creditable amount, however, is not cancelled on a write-off or loss of goods — an exception that deserves the auditor's attention.
Audit Risks and Fines
In a VAT audit the principal risk is documentary: a defect of the invoice directly defeats the credit. The law balances ruthlessness with fines: the supplier's failure to issue an invoice at the buyer's request entails a fine of 100 percent of the VAT amount on the taxable operation, and the issuing of a fictitious or forged invoice — 200 percent of the indicated VAT amount. Activity without VAT registration entails a fine of 5 percent of the amount of the taxable operations carried out during that period; where this fine applies, the sanctions foreseen for the submission of the declaration are not applied to the same period. To prepare for an audit, the register of credits should be grouped by types of operations and each group compared with the criteria above — destination, document, period, restriction.
The Methodology of Diagnostics
VAT diagnostics is not a one-time check of a declaration — it rests on the continuous classification of turnover. The first step separates groups of operations: local purchases, imports, reverse charge and expense components; on each group, destination, document and period are measured separately. The second step verifies the catalogue of restrictions and the need for correction. The third step compares the results with the sequence of declarations, since the picture of one period changes through subsequent corrections. This three-step approach allows the auditor to reach problem areas before a documentary defect surfaces.
The Practical Stages of Audit Preparation
The precondition of an audit is a complete documentary register: every invoice, import declaration and payment confirmation must sequentially attach to its operation. Next comes the control of the risk of forged invoices: identification of the counterparty, the reality of the operation and the correspondence of the VAT amount — these three elements are directly linked to the 200-percent sanction threshold. Last is the annual control of the 3-year term: the removal of credits of overdue operations requires a correction of the declaration, and this is better done before an audit than through an act of the organ.
Frequently Asked Questions
Below we answer the questions most frequently asked on this subject.
On what basis is VAT credited?
On a tax invoice, an import declaration or the reverse-charge amount reflected in the declaration.
When is VAT not credited?
On entertainment and representative expenses, in operations without the right of credit, on a defective invoice and on an operation more than 3 years old.
When is the creditable amount corrected?
When the circumstances determining the taxable amount change — in the reporting period of the change.
What fine follows an invoice deficit?
Non-issuance — 100 percent of the VAT; fictitious issuing — 200 percent.
How We Help on Legal.ge
VAT diagnostics and audit preparation require systematic work. On Legal.ge you can consult a tax lawyer who will audit your credits and protect your interests. Submit a request on the site and receive qualified assistance.