Introduction to VAT in Saudi Arabia

Tally Solutions | Updated on: February 14, 2023

• What is VAT?
• From when will VAT be applicable in Saudi Arabia?
• What is the deadline for registration under VAT in Saudi Arabia?
• What will be the rate of VAT?
• How frequently should VAT returns be filed?

I'm honored that I'm in history, but I don't think it would mean anything if it doesn't change anything. - Raha Moharrak

History is being made in Saudi Arabia. Come 2018, and the Kingdom of Saudi Arabia will implement Value Added Tax (VAT) in the country. While this measure has been taken by the Government to increase the revenue in the country, for businesses, it has become crucial to understand VAT and take measures for a smooth transition to VAT and compliance under VAT.

Let us first briefly understand VAT in Saudi Arabia.

What is VAT?

VAT stands for Value Added Tax. It is a tax imposed on the supply of goods or services. The tax is levied on the value addition at each stage in the supply chain, from the production and distribution to the final sale of the product or service to the consumer.

What is VAT?

VAT or value-added tax is also known as goods and service tax in some countries, is a kind of tax that is levied incrementally on the price of a product or service at the production stage, distribution, or sale to the end customer.

How the VAT mechanism works in Saudi Arabia?

A business that is registered in Saudi Arabia that needs to get raw material to manufacture a product is required to pay an extra 5% VAT on top of the cost price. The seller will take the 5% VAT and will provide it to the government. The tax that is paid to the seller is known as the output VAT. Once the business sells the finished product, the customer will pay an additional 5% VAT on top of the product's selling price. The tax paid by the customer is known as input VAT.

What will be the rate of VAT?

VAT will be applied at the rate of 5% to most goods and services. The rate structure under VAT will broadly be as follows:

How frequently should VAT returns be filed?

Filing of VAT return and payment of tax will be due within a month after the end of a month/quarter (as applicable).

For businesses in Saudi Arabia, this is the time to step up and get familiar with the provisions of VAT and prepare accordingly. From 1st January, 2018, beginning from the task of maintenance of transaction records as per VAT rules to issue of VAT compliant invoices and filing of accurate returns by the due date, everything has to be compliant with VAT rules and regulations. Businesses that have, till now, maintained manual records of their transactions will find it very difficult to continue the same under VAT.

Let us list down, broadly, the activities that every business has to perform under VAT:

• Ensure books of accounts until 1st January, 2018 are up to date, as registration under VAT is applicable based on businesses' annual taxable supplies
  
  
• Educate employees, vendors, and customers about VAT and its impact on each of these stakeholders
  
  
• Review business processes and policies with respect to pricing, procurement, invoicing, logistics, etc. to align with VAT rules and regulations
  
  
• Maintain accounts and records and issue invoices in the prescribed manner and format
  
  
• Furnish information for the filing of returns in an accurate manner on a monthly/quarterly basis (as applicable)
  
  
• Correct calculation of tax due and an input tax deduction and payment of tax due on a monthly/quarterly basis (as applicable)

Businesses eligible for VAT in Saudi Arabia

Any business with operations in Saudi Arabia, and the value of taxable supplies surpassing SAR 187,500 but not surpassing SAR 375,000 in the initial 12 months or expect it to surpass in the next 12 months, are eligible for VAT registration.

VAT registration in Saudi Arabia

To registers a business in Saudi Arabia, follow the below mentioned process: 

• Register for Tax Identification Number (TIN)
• Login to the GAZT portal
• Select the option VAT registration from the dashboard
• Provide the details and documents for finishing VAT registration.
• Declaration

What are Taxable and non-taxable supplies under KSA VAT Saudi Arabia

Standard-rated supplies: All products or services delivered in Saudi Arabia are eligible for 5% VAT unless they are marked as exempt or zero-rated. Some instances of standard-rated supplies contain:

• Food and beverages
• Private healthcare and educational services
• Local transportation
• Rent and sale of commercial buildings
• Sale of residential buildings

Exempt supplies: Goods and services that are specified as exempt will not have to pay VAT. Some of the examples of exempt goods and services are:

• Residential rent (leasing and renting of the residential property)
• Specific financial services

Zero-rated supplies: Zero-rated supplies consist of a 0% VAT rate and include:

• Non-GCC exports
• International transport
• Medicines and medical goods
• Investment in certain metals like gold, silver or platinum 

Keeping track of each compliance activity, preparation of records, returns, paying taxes on time, etc. will require a considerable investment of time, employees and energy to do these tasks manually. It is, hence, very important for businesses to evaluate the various software available and select an appropriate software that will ease the compliance activities and leave you with enough time and resources to focus on your business.

For tax practitioners also, this is a crucial period to learn, understand and prepare for VAT and the compliance activities which will arise with the implementation of VAT. It is important for them to prepare themselves, their teams as well as their clients for VAT.

While history is being made in Saudi Arabia with the implementation of VAT, this is the opportunity for businesses to capitalise on the new business environment under VAT through adequate preparation and planning.

FAQ

What is the deadline for registration under VAT in Saudi Arabia?

The deadline for registration under VAT is 20th December '17.

How does VAT work in Saudi Arabia?

VAT in Saudi Arabia refers to the indirect tax that consumers pay on specific goods and services. When a VAT registered business sells a product or service, consumer need to pay 5% VAT.

From when will VAT be applicable in Saudi Arabia?

VAT will be applicable from 1st January, 2018.

Who is exempt from VAT in Saudi Arabia?

The following are exempted from VAT:

• Residential rent (leasing and renting of residential property)
• Specific financial services

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