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Most large businesses in Saudi Arabia have already obtained a VAT registration. For businesses whose turnover exceeds SAR 375,000 but does not exceed SAR 1,000,000, a deadline of 20th December ’18 has been laid down, for obtaining a VAT registration. However, for businesses whose turnover exceeds SAR 187,500 but does not exceed SAR 375,000, obtaining a VAT registration is entirely optional.
On the face of things, most of these businesses would prefer to not register, considering the additional costs and compliance activities that come with obtaining a VAT registration. However, it is important for such businesses to know about the immense benefits that come with being a VAT registered dealer. In this article, let us understand the benefits of registering under VAT.
A major benefit of registering under VAT is that a business will be eligible to recover VAT paid on purchases or expenses incurred in the course of business.
Example: Al Huseini Electronics is an unregistered business in Saudi Arabia. The business incurs VAT on various electronics it purchases for resale to consumers as well as general business expenses such as office purchases, professional fees, car hire, etc. Since Al Huseini Electronics is unregistered, the VAT paid on these purchases and expenses becomes a cost to the business. On the contrary, if Al Huseini Electronics obtains a VAT registration, they are eligible to recover the VAT paid on business purchases and expenses.
The provision to recover tax paid on purchases ensures that the business can pass on the credit of VAT and avoid double taxation in a supply chain. This becomes an important factor when other businesses decide to supply to or buy from the business. If any business in the supply chain is an unregistered dealer, it leads to a rise in the price of the product and consequently, results in higher prices for the end consumer, as compared to a supply chain consisting of registered dealers. Hence, being VAT registered is necessary for businesses to ensure that registered businesses want to deal with them.
Only registered businesses can issue tax invoices for supplies made. A registered business can recover input tax only on purchases from registered businesses, which are accompanied by tax invoices. Hence, registered businesses would always prefer to make purchases from registered businesses, in order to ensure that they can recover input tax on such supplies. In such a case, obtaining a VAT registration is essential for businesses to ensure that registered businesses continue to make purchases from them.
Supplies such as export of goods, export of services, supply of investment metals, etc. are notified as zero rated supplies. Registered businesses making such supplies are eligible for a refund of VAT paid on purchases used to make the zero rated supplies. Hence, businesses that make zero rated supplies would be benefitted by obtaining a VAT registration. A VAT registration would enable them to obtain a refund of the VAT paid on purchases, thus reducing the costs of making such supplies.
Possessing a VAT registration lends credibility to a business. It gives an impression that the business is established and has an identity. This becomes very useful for small businesses to grow their business and deal with new customers.
A small business needs to constantly keep a tab on when its turnover is crossing the threshold limit for registration. In case the business’s turnover crosses the threshold limit of SAR 375,000 and the business has not registered, it has to pay heavy penalties for not registering. A person who has not applied for registration within the specified period is liable to pay a heavy penalty of SAR 10,000. On the contrary, a business that has obtained a VAT registration does not need to worry about crossing the threshold limit and the associated penalties.
Hence, it is suggested that small businesses should evaluate the many benefits of obtaining a VAT registration and make an informed decision on whether to register or not. While obtaining a VAT registration brings with it additional costs of compliance, along with the need to keep accurate records and submit regular returns, the benefits of registration are immense.
Read more on Saudi Arabia VAT
Introduction to VAT in Saudi Arabia, Saudi VAT Return Format, What is Time of Supply under VAT Saudi Arabia, Saudi VAT for Export of Services Outside GCC, Export of goods to Non-GCC countries from Saudi Arabia, VAT rates in Saudi Arabia, Zero-Rated Supplies under VAT in Saudi Arabia, Difference between zero rated & exempt VAT in Saudi Arabia, VAT Exempt Supplies/Items in Saudi Arabia
VAT invoice in Saudi Arabia, VAT invoice format in Saudi Arabia, Types of invoices under VAT in Saudi Arabia, Simplified Tax Invoice in Saudi Arabia, Checklist for VAT invoice in Saudi Arabia, Your Ready Reckoner for VAT Invoice in Saudi Arabia
Input Tax Deduction on Goods and Services Purchased Before VAT Registration