Input Tax Apportionment: What Is It? Which Businesses Must Do It? Heavy Penalties for Non-Compliance!

"Input Tax Apportionment" - What Is It? Which Businesses Must Do It? Heavy Penalties for Non-Compliance!

Have you ever wondered... why can't you claim back 100% of the VAT from office electricity bills or rent? Or why does your accountant say "This needs to be apportioned"?

For SME business owners operating mixed businesses, "Input Tax Apportionment" is a critical concept you must understand. In 2025, the Revenue Department has implemented stricter new guidelines. If you continue using old methods, you risk facing retroactive penalties without even realizing it.

Today, Orbit Advisory will simplify this complex topic and delve into the new rules about "Out of Scope" activities that many are confused about.

What is Input Tax Apportionment?

Normally, if you run a VAT-registered business, when you purchase goods for business use, you can claim back or deduct the "input tax" from your output tax, right?

But... the business world isn't always that simple. Suppose your company runs two businesses simultaneously:

1. Product Sales (VAT Business): For example, selling construction materials (can claim input tax back)
2. Apartment Rental (Non-VAT Business): Residential rental income is exempt from VAT (cannot claim input tax back)

Here's the problem: What about "shared electricity bills" or "office building construction costs" used by both the product sales department and rental department? How do you claim back the input tax?

The answer is "you must apportion" it. The law states you cannot claim back this entire input tax amount. You must divide it fairly according to actual revenue generated. This principle references Director-General of Revenue Department Announcement on Value Added Tax No. 29.

"Revenue Base" Checklist

This checklist helps you understand which revenue types should and should not be included in calculating input tax apportionment.

Basic Principle: "Use Last Year's Revenue to Determine This Year's Fate"

According to the Revenue Department Manual, the general method for input tax apportionment (for shared expenses like electricity, rent, accounting fees) considers your business's "time period":

1. Established Businesses (Subsequent Years)

• Calculation Method: Use the revenue proportion from the "previous year" (Year N-1)
• Example: In 2025, you have 60% VAT revenue : 40% Non-VAT revenue → Therefore, throughout 2026, you can immediately claim back 60% of shared input tax invoices
• Key Point: The Revenue Department specifies "no year-end adjustment required" (No Adjustment) even if actual 2026 revenue changes to 50:50 (considered final - very convenient!)

1. New Businesses (Commencement Period)

• Calculation Method: Use "estimated revenue" for that year
• Important Condition: The law allows you to claim back input tax not exceeding 50% initially (conservative approach)
• Year-end: Must calculate actual revenue and file Form PP.30.2 to adjust amounts (refund to Revenue Department or claim additional refund) within the first month of the following year

Shortcut for High-Revenue Businesses: "90% Rule (De Minimis Rule)"

The Revenue Department provides exemptions for businesses with revenue heavily skewed toward one type to reduce documentation burden.

• If VAT revenue > 90% of total revenue: ✅ Your benefit: Choose to claim back 100% of input tax (no apportionment needed!)
• If Non-VAT revenue > 90% of total revenue: ❌ Consequence: Choose not to claim any input tax (deduct entire amount as company expense)

Therefore, if your business has minimal Non-VAT revenue (such as interest received), check this rule immediately as it will make your work significantly easier.

Construction Trap: "Building Construction - Cannot Use Revenue Method!"

If you're constructing an office building or factory used for both VAT and Non-VAT businesses (e.g., ground floor for sales, upper floor for residential rental):

• Prohibition: Absolutely prohibited from apportioning based on revenue
• Requirement: Must apportion based on "estimated floor space usage" (Floor Space Method)
• Action Required: File Form PP.05.1 to notify Revenue Department within 30 days of construction start
• Risk: Upon completion, must measure actual floor space and "retroactively adjust input tax from the first day of piling". Incorrect calculation may result in significant additional penalties.

What if I Apportion Incorrectly... and Claim Back More Input Tax Than Entitled?

Don't panic! The law provides a solution. If you recalculate and find that the amount claimed back initially was "excessive" compared to the actual entitled amount (Over-claimed), follow these steps:

1. Refund the Difference: Return the excess input tax amount to the Revenue Department
2. File Form PP.30.3: File this form monthly (separate for each month of over-claim) by the 15th day of the following month after discovery and adjustment
3. Good News in Bad News: The excess input tax amount you refund to the government is not wasted! You can record this amount as a "deductible expense" or "asset cost" for corporate income tax (CIT) deduction at year-end.

How to Calculate: How to Apportion Correctly?

The most commonly used standard method is "apportionment by revenue proportion" (Revenue Method).

Simple formula: Whichever side has more revenue bears that proportion of input tax burden.

Example:

• Sales revenue (VAT): 70 million THB
• Rental revenue (Non-VAT): 30 million THB
• Summary: You're entitled to claim back only 70% of shared input tax. The remaining 30% must be written off (non-deductible expense).

Real Example (Case Study): Company A - Chicken Trader

For clarity, let's examine this example:

Company B is a registered operator with 3 mixed businesses:

1. Fresh Chicken Exports: (0% VAT - considered VAT Business)
2. Domestic Fresh Chicken Sales: (Agricultural products - VAT exempt - considered Non-VAT Business)
3. International Trading: (Products never enter Thailand - considered Out of Scope or non-VAT business under Section 77/2)

Financial Data:

• Export revenue (VAT): 6 million THB
• Domestic sales revenue (Non-VAT): 10 million THB
• International trading revenue (Out of Scope): 4 million THB
• Total revenue: 20 million THB
• Shared input tax requiring apportionment: 1,000,000 THB

(Note: Previous year company had VAT : Non-VAT revenue proportion of 50 : 50)

Step-by-Step Calculation of Claimable Input Tax:

1. Step 1: Exclude Out of Scope Portion First Out of Scope revenue is 4 million THB (from 20 million THB) = 20%. Therefore, first portion of input tax that must be excluded = 1,000,000 x 20% = 200,000 THB (cannot claim)
2. Step 2: Apportion Remaining Portion by Traditional Law Remaining input tax = 1,000,000 - 200,000 = 800,000 THB. Apportion this amount according to previous year's revenue proportion (50 : 50). Claimable input tax = 800,000 x 50% = 400,000 THB

Summary: From 1 million THB of input tax, Company B can actually claim back only 400,000 THB.

What Happens If You Don't Do It or Do It Incorrectly?

Don't overlook this issue as the penalties are more severe than you think:

1. Penalty: 1-2 times the over-claimed tax amount
2. Surcharge: Interest at 1.5% per month (no ceiling! The longer the delay, the more the interest compounds, potentially exceeding the principal amount). See penalty calculation examples and actual Revenue Department penalty examples
3. Audit Risk: When the Revenue Department investigates this issue, they typically dig into other areas of your financial statements as well.

Conclusion: The Deeper Your Tax Knowledge, The More You Save

Input tax apportionment may seem complicated, but if you establish clear accounting systems to categorize revenue and expenses from the start, it becomes straightforward and helps you maximize your tax benefits legally.

Orbit Advisory is ready to serve as your consultant, helping you plan and verify correct input tax apportionment according to the new 2025 regulations.

• Tax health check review
• Establish clear cost center systems
• Calculate precise tax apportionment proportions

Don't wait for the Revenue Department to send you a letter. Contact us today for your business's peace of mind.

5 Frequently Asked Questions (FAQs) About Input Tax Apportionment

Q1: I have international revenue (Out of Scope). How do I calculate input tax apportionment?

A: You must exclude this revenue portion first. This means the corresponding input tax portion cannot be claimed at all. Then, apportion the remaining input tax according to normal revenue proportions in the next step.

Q2: I'm constructing an office building. Can I use the company's "revenue" apportionment method?

A: Absolutely not! For building construction cases, the law mandates apportionment based on "estimated floor space usage" (Floor Space Method) only. You must file Form PP.05.1 to notify the Revenue Department within 30 days of construction start.

Q3: Do I need to file input tax adjustment forms (PP.30.2) every year?

A: Not every year. For ongoing established businesses, you can use the previous year's revenue proportion without year-end adjustments. You only need to file Form PP.30.2 for "new businesses" (first year) cases.

Q4: If I calculate incorrectly and accidentally claim back "excessive" input tax beyond my entitlement, what should I do?

A: Immediately refund the difference to the Revenue Department and file Form PP.30.3 by the 15th day of the following month. Good news: the excess input tax amount you refund can be recorded as a deductible expense or asset cost for corporate income tax deduction at year-end.

Q5: I have minimal Non-VAT revenue. Do I need to go through complicated apportionment calculations?

A: Maybe not! If your VAT revenue exceeds 90% of total revenue, you're entitled to claim back 100% of input tax without any apportionment. Conversely, if Non-VAT revenue exceeds 90%, you can choose not to claim any input tax (deduct entire amount as expense).