Difference between zero rated & exempt VAT in Saudi Arabia

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Tally Solutions, Feb-04-2020

In our article 'VAT rates in Saudi Arabia', we have learnt about the various types of VAT rates applicable to supply of goods and services in KSA. Supplies can be taxable @ 5%, taxable @ 0% (or zero rate supplies), exempt or out of scope of VAT. With respect to these VAT rates, a very common query in the minds of taxpayers is about the difference between zero rate, exempt and out of scope supplies. While it is clear that VAT is not charged in case of these supplies, it is also important to understand the real difference between them and the reason VAT is not charged on these supplies. In this article, let us understand the difference between zero rate, exempt and out of scope supplies in KSA Saudi VAT.

 

Zero rate supplies

Exempt supplies

Out of scope supplies

Meaning

Zero rate supplies are taxable supplies, on which VAT @ 0% should be charged

Exempt supplies are specific supplies which have been declared as exempt. On these supplies, VAT should not be charged

Out of scope supplies are supplies which are kept out of the purview of VAT

Input tax recovery

These are considered as taxable supplies. Hence, input tax can be recovered on supplies used to make zero rate supplies

Input tax cannot be recovered on supplies used to make exempt supplies

As out of scope supplies are out of the purview of VAT, there is no concept of input tax recovery on such supplies

Examples

  • Supply of specific financial services

  • Renting of residential buildings
  • Supplies by persons not registered under VAT

  • Supplies not made in the course of an economic activity

Hence, as evident, zero rate, exempt and out of scope supplies are all supplies on which VAT is not charged. However, it is important to note that the reason why VAT is not charged on each of these supplies is different. Also, a very important difference between these supplies is that input tax can be recovered on supplies used to make zero rate supplies whereas the same is not allowed for supplies used to make exempt supplies. As out of scope supplies are kept out of the purview of VAT, there is no concept of input tax recovery on these supplies.