VAT in Saudi Arabia
What is VAT?
Value Added Tax (VAT) is a consumption tax levied on the value added to goods and services at each stage of production or distribution. It is ultimately borne by the end consumer, making it an indirect tax. VAT is widely used around the world as a means for governments to generate revenue while also providing a relatively stable source of income. In essence, businesses collect VAT on behalf of the government on their sales and remit it to the tax authorities. VAT is typically charged as a percentage of the selling price of goods or services and is applied at each stage of the supply chain. VAT regulations vary from country to country, and businesses operating internationally must comply with the VAT laws of each jurisdiction in which they operate.
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:
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 |
Businesses with taxable supplies exceeding SAR 40 million | Monthly returns |
Businesses 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 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)
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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.
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