Introduction to VAT | VAT in Saudi Arabia | Understanding VAT

I'm honoured 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 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.

From when will VAT be applicable in Saudi Arabia?

VAT will be applicable from 1st January, 2018.

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

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

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:

Rate structure Applicable for
Taxable @ 5% Most goods and services, such as food and beverages, commercial sale and rent of property, etc.
Taxable @ 0% Includes supply of medicines and medical equipment specified by the Ministry of Health and the Saudi Food and Drug Authority (SFDA), supply of gold and silver for investment purposes provided they are at least 99 percent pure and tradable in global markets, exports outside the Gulf Cooperation Council (GCC)
Exempt Includes financial services such as dealing in money or securities, providing credit or credit guarantee for customers, and life insurance and reinsurance contracts, renting of residential property
Out of scope Services provided by government agencies as public authorities, such as the issuance and renewal of passports and driving licenses, public education, public healthcare, etc.

How frequently should VAT returns be filed?

Type of business Frequency of Return filing
Business with taxable supplies exceeding SAR 40 million Monthly returns
Business with taxable supplies up to SAR 40 million Quarterly returns

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 to VAT rules and regulations. Businesses which 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:

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

Keeping track of each compliance activity, preparation of records, returns, paying taxes on time, etc. will require 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 which 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.