ACCA Advanced Taxation (ATX) Practice Exam

How is exemption from input tax defined in the context of partial exemption?

1. Slightly under 50% of all supplies

2. A maximum of 75% of all supplies

3. Less than 50% of exempt supplies

4. More than 50% of exempt supplies

The correct answer is: Less than 50% of exempt supplies

In the context of partial exemption, exemption from input tax refers to the situation where a business incurs input tax that cannot be fully recovered due to the nature of its supplies. A business with exempt supplies is only able to recover input tax related to their taxable supplies and must proportionately allocate input tax between these taxable and exempt supplies. The correct answer indicates that "less than 50% of exempt supplies" is the threshold for being classified as a partial exemption. In practice, if the value of exempt supplies is under 50% of total supplies, a business is still able to recover a specific proportion of the input tax related to its taxable supplies. This is important because it aligns with the principles of how VAT works in most tax systems, which require businesses to effectively manage their input tax recovery based on their exempt and taxable supply proportions. The context helps in understanding the rationale behind the partial exemption – when exempt supplies are kept below a certain threshold, it allows businesses to maintain a level of efficiency in recovering input taxes, thereby promoting business operation viability even with exempt items.