Understand the Basics of VAT in Saudi Arabia

Value added tax (VAT) is one of the outstanding tax forms that was adopted by the zakat, tax, and customs authority (ZATCA) of Saudi Arabia. Having started at a standard or normal rate of %5 in the initial years, the VAT rate was increased to %15 in 2020 to change the face of taxation. This was done so as to make Saudi Arabia a non-oil dependent economy into the future. VAT in Saudi Arabia relates to at the sale of goods and services and exists in a way so that businesses and consumers ask for assistance in dealing with it.

Understanding of Saudi Arabian VAT comprises the examination of its application for daily purchases, how companies manage input tax, as well as, filing of VAT returns. Thus it might sound and look cumbersome at first sight, but when properly understood, vat is quite easy to handle. This involves awareness of the accounting e-invoicing in Saudi Arabia, which is mandatory by ZATCA for correct and clear tax disclosure.

This guide is crafted to demystify the understanding of VAT in KSA by providing brief information on how VAT is charged, the compliance measures that are required, among other things the implications of VAT to businesses persons, VAT in Saudi Arabia consumers and the economy as a whole. For any organization planning to learn more on how to deal with taxes or a buyer trying to keenly understand how VAT impacts their purchasing decisions in KSA, this blog aims to provide a handy guide to understanding VAT in Saudi Arabia.

VAT Registration in KSA

The Saudi Arabia law requires anyone involved in economic activity to register for VAT provided they exceed certain thresh holds. Any business, enterprises or establishments that has a turnover of or above SAR 375,000 on their taxable supplies in the previous twelve months are obliged to register in the”VAT” system. This guarantees conformity to the set laws and standards with regard to precise collection of taxes besides adding onto the Saudi Arabian fiscal plan.

The kind of businesses and operation that entails VAT registration engage in economic activities that are permanent or recurrent in nature, being business, industrial, agricultural and or, professional. By restricting such activities to come within the ambit of taxable activities, the Saudi government makes sure that VAT is levied across sectors and all businesses equally, which enforces equality in the total taxation procedure.

Input Tax Deduction Under KSA VAT

• In regard to KSA VAT, the input tax refers to the tax charged on acquiring or bringing in the supplies for making the taxable products or providing the taxable services.
• If a taxable person has paid such tax and has used the acquired goods for making taxable supplies he may offset this amount.
• For instance, where a colour paint manufacturer purchases powder colour to use in the production of the paint, he would pay VAT on the purchase of the material. He can deduct the input tax credit for the VAT paid on the powder color fulfills raw material acquired when filing the return for the VAT chargeable on the paint final product.

VAT Records in KSA

VAT records include the calculation of VATs, details of input and output tax, books of accounts. The amount of work involved is likely to significantly increase because the implementing regulation stipulates that the VAT records have to be kept in the Arabic language VAT in Saudi Arabia.

Below is a comprehensive list but not exhaustive of what the VAT records should include:

• The tax invoices that are generated an issued as well as those received by organizations
• Accounting records
• The big volume of sale or purchase orders
• Balance sheet in particular and other financial statements in general.
• Entry and exit papers and documents, shipping documents
• Other writings can also concern the calculation or preparation of the VAT return.

Cash Accounting Scheme

The cash accounting scheme in Saudi Arabia is beneficial to only small businesses with a turnover of not more than SAR 5 million per annum. In its broadest sense, this scheme follows the simple rule where businesses charge VAT only

when they receive cash for their sales or make payment for their purchases rather than when preparing invoices. This approach of link VAT responsibility with the actual cash flow paves way for small business to be relieved from pre-vendor VAT calculation based on issued invoices.

This scheme has enormous benefits in the sense of avoiding huge amounts of paperwork. Small businesses can minimize the importance of recording output and input VAT systematically as they only record transactions when receiving or paying money. It does not only enhance the management of cash flow, but it also reduces the chances of making accounting mistakes, providing small business persons with a viable way of meeting the VAT regulation without occupying most of their time.

Profit Scheme

This scheme applies to used goods. That is why the ZATCA allows the application of this method only to the profit on the sale of used goods. To use the scheme, the taxable person must apply to ZATCA if they meet the following conditions:

Products need to meet the definition of used goods according to ZATCA

The supplier also needs approval from ZATCA concerning the usage of the profit method for supplying qualifying used goods.

The supplier purchased these goods in KSA from:

• A taxable person who for whatever reason is making sale of goods outside of the economic activity.
• A very typical example is a supplier that is using a profit scheme.
• A non-taxable person.
• Goods must be in KSA.
• There are certain general conditions of invoicing and record reticular policy that has to be followed by the supplier of eligible used goods.

Types of Supplies Under KSA VAT Law

Zero-rated Supply

Zero rated supplies are those supplies on which VAT is levied at 0%. On the customer side, no VAT amount is charged but on the business side, input tax credit is allowed for related costs. These include cross border transport of passengers and cargo since movement and trade are considered critical activities which should be encouraged to support the global economy.

Taxable Supply

The standard rated supply is the supply of most goods and services for consideration which attracts the standard VAT rate of 15% (which was 5% before the change in law). VAT paid is recovered through input tax credit for expenses incurred in relation to the business of making taxable supplies. This is manifested in renting out of commercial buildings with more activities shown to contribute some taxes.

Exempted Supply

The supplies that are completely outside the operation of the Value Added Tax Act are excluded from Value added tax charges; no input tax credit can be recovered in relation to such supplies. A good example is the hiring of residential places where tax incentives assist in cutting the cost of the tenant while ensuring policy certainty.

Out-of-Scope Supply

The supplies that are considered out of scope do not attract VAT nor are they allowed input tax credit. These include activities that are not classified as economic in nature, services enacted without the exchange of money, to name but a few so that they are not eligible for taxation.

VAT Returns in KSA

VAT returns are a self-completion of a taxable person’s net amount of tax payable for a specific tax period. Filing of VAT returns in KSA is compulsory for all the VAT registered business and individuals.

Any taxable person whose turnover exceeds 40 million SAR per year should submitting monthly VAT return. If the annual turnover is up to SAR 40 million and the taxable person is a resident of Saudi Arabia, he has an opportunity to file the VAT returns quarterly. The VAT returns should be filed online to the ZATCA.

Appeals under Saudi VAT Law

According to section (33) of the KSA, if a taxable person is dissatisfied or has an objection with the ZATCA assessment in regard to any error in the VAT return or any document, he possesses a right to appealing in the evaluation to submit the objection.

Appeals gives the taxpayers, the rights to justify their actions and methods to the ZATCA. However, an appeal against an assessment notification should be made by the taxable person not later than 30 days from the date the notice was given. Otherwise, the result of the assessment will be considered as the final one.

Impact of VAT on Businesses

After VAT introduction, businesses must:

• Closely keep all the accounts of the business
• Customers also pay an additional amount called rise invoices for all activities.
• Optimize the related business activities
• File returns on time
• Penalties for offenses

Any kind of infringement of any rules and regulations carries a provision for the authority to claim penalties and fines on the taxable persons. It can also assess the degree of compensation or penalty depending on the behaviour and the cooperation it gets from the taxpayer.

Penalties for Offenses

This paper also analyses the types of penalties for VAT offenses in Saudi Arabia to show that penalties are used to discourage the violation of VAT laws and maintain the sanctity of the revenue system. Zakate Tax and Customs Authority has the right to imposing penalty and fine depending on the extent and intentionally of the violation.

Fraud related offences including presentation of faked documents to avoid paying or making unlawful claims for refunds are prohibited and attract a penalty of between the equivalent of the amount of VAT to three times the value of goods or services. This is a way through which the system cannot be abused and at the same time encouraging the right practices among the taxpayers.

Other well-known offences include filing of VAT returns in the wrong format, failing to register under VAT or inability to maintain sufficient records. For instance, failure to file VAT returns enables a business to receive fines ranging from 5% to 25% of the VAT while registering for VAT but failing to do so will lead to fines not exceeding SAR 100, 000. These sanctions ensure that the businesses adhere to the provisions of VAT and also keep them very careful each time they are undertaking an economic activity that would require compliance with provisions of the VAT Act. Another aspect of penalties which are flexible at the discretion of ZATCA is cooperation and behaviour of taxpayer.

However, a penalty for repeat offenders is doubled if the person has violated the law within three years of final decision of the court affirming the violation of the law. However, as seen above, VAT understanding and management is not very difficult using the materials and guidelines provided by the ZATCA knowledge center or tutorials and guidelines. These tools help business and other users to operate and adopt the VAT laws without any legal complications hence no penalties. If rules are followed correctly and if the firm gets hold of the correct literature published by ZATCA the VAT procedure is not a complex one.

Conclusion:

Therefore, VAT in Saudi Arabia is significant in the developmental and diversification of this nation’s economy. Basic knowledge about VAT, for example registration, cash accounting scheme, record keeping through tools including accounting e-invoicing in Saudi Arabia will assist businesses in dealing with this tax system. The recent change in the rate of the VAT to 15% means that it has become crucial for businesses to change their structure and processes to meet the requirement while taking advantage of some of the simplified methods such as the cash accounting scheme for small business.

Any person who wants to conduct business in Saudi Arabia should ensure that they understand the VAT laws to avoid incurring the wrath of the law when implementing the same. If you are new to the VAT in Saudi Arabia or whether you are already well-established and wants to improve your strategy, staying updated and learning about VAT in KSA will ensure a continued effective and compliant business flow. Through proper registration of VAT, correct deduction of VAT and filing of returns an organization can be able to ensure long term sustainability and support the Saudi Arabia’s non-oil revenues.