A recoverable tax is a tax that allows full or partial recovery of taxes paid on purchases, either as a recoverable payment or as an offset against taxes owed. Also known as "Input Tax Credits" this tax is normally recovered because it was paid on an item that will be used in creating another item sold to an end user.
There are usually many regulations surrounding the details of tax recovery. Typically only a portion of the tax amount paid is recoverable, and tax authorities designate the tax recovery rates that indicate the extent of recovery for a specific tax. As with all tax setup, consult your tax department or a tax professional to determine how you should configure your system.
1. 100% Recovery Tax: Most VAT-type taxes allow for full recovery of taxes paid on goods and services that relate to taxable business supplies.
2. Partial Recovery Tax: In cases where an organization purchases both taxable and exempt supplies, the tax authority can designate a partial recovery rate to reflect the combination of taxable and exempt statuses.