VAT in Saudi Arabia: A Quick Guide

Tally Solutions | Updated on: December 17, 2024

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

Value-Added Tax (VAT) was introduced in Saudi Arabia on January 1, 2018, as part of the country’s efforts to diversify its economy and reduce dependency on oil revenues. Initially set at 5%, VAT brought a significant change to the way businesses operate, and consumers interact with the economy. However, in July 2020, Saudi Arabia increased the VAT rate to 15% as a response to the economic challenges posed by the COVID-19 pandemic. This increase has had wide-ranging implications for businesses and individuals alike, further highlighting the importance of understanding VAT compliance. 

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.

VAT Rates & Applicability 

Saudi Arabia applies three distinct VAT rates to goods and services: 

• Standard Rate (15%): Applies to most goods and services. 

• Zero Rate (0%): Covers specific exports, healthcare, and education services. 

• Exempted Categories: Includes financial services and residential real estate. 

Transitional Provisions 

When VAT was increased from 5% to 15% in 2020, transitional provisions were implemented to ensure a smooth adjustment for businesses. These provisions outlined how existing contracts and invoices should be treated to comply with the new rate. 

Goods and Services Subject to VAT 

Most goods and services in Saudi Arabia are subject to VAT unless explicitly exempted or zero-rated. Businesses must carefully evaluate their offerings to determine the applicable rate. 

VAT-Exempted Categories 

Some categories, such as financial transactions and residential rent, are VAT-exempt. This means businesses dealing in these areas don’t charge VAT to their customers but may have limited recovery of VAT incurred on their inputs. 

How frequently should VAT returns be filed?

VAT Registration 

Businesses operating in Saudi Arabia must register for VAT if their taxable sales exceed 375,000 SAR over the past 12 months or are expected to exceed this threshold in the upcoming year. Registration is crucial for compliance and allows businesses to charge VAT on their sales. For a detailed guide on the VAT registration process in Saudi Arabia, you can refer to this step-by-step guide. 

VAT Compliance 

Compliance with VAT regulations is essential for all businesses in Saudi Arabia. Key compliance requirements include: 

• Filing VAT Returns: Businesses must regularly file VAT returns detailing their sales and purchases. 

• Record-Keeping: Accurate records of all transactions must be maintained to support tax filings. 

• Invoicing: Proper invoicing practices must be followed, including displaying the correct VAT rates. 

Recent updates have introduced new digital requirements for filing returns electronically through the Zakat, Tax and Customs Authority (ZATCA) portal. Penalties for late submissions or non-compliance can be significant, emphasizing the importance of adhering to these regulations. 

VAT Return Filing, Deadlines, & Refunds 

The frequency of VAT return filings depends on business size: 

• Monthly Filings: Required for businesses with annual revenues exceeding 40 million SAR. 

• Quarterly Filings: Applicable for businesses with revenues below this threshold. 

Recent updates have streamlined the filing process through ZATCA's online portal, making it easier for businesses to comply with deadlines. Additionally, there are provisions for refunds for both local businesses and eligible non-resident entities. Recent changes by ZATCA have enhanced these refund processes, allowing quicker access to funds for those who qualify. 

In summary, understanding and navigating the VAT system in Saudi Arabia is vital for businesses operating within its borders. With ongoing adjustments and updates from ZATCA, staying informed about compliance requirements and changes is essential for successful operations. 

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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