Introduced on January 1, 2018, Value Added Tax (VAT) in the Kingdom of Saudi Arabia underscores a legitimate intention of diversifying its economy and lessening oil revenue dependence. The allocation of VAT is one among several fundamental strategic goals set by the kingdom’s 2030 Vision developed for improving fiscal policy and enhancing the efficiency of tax administration. VAT is levied on all major goods and services at the standard rate of 15%, which came into effect from July 1, 2020: it was originally fixed at 5%.
There has been an immense operational shift on the system and is also impacting both businesses and consumers. Businesses are composed to register for VAT if taxable annual sales by them exceed SAR 375,000 and charge VAT on taxable sales and file VAT returns. Businesses must also remit tax on the collected VAT to the General Authority for Zakat & Tax (GAZT). This system promotes transparency so that businesses can result in the generation of revenue for the Kingdom.
Apart from VAT, e-invoicing is being enforced in Saudi Arabia on all businesses registered for VAT. The introduction of e-invoicing in Riyadh and the rest of the Kingdom streamlines the invoicing process, reduces opened doors for errors, and hence adds good efficiency to the system. The switch to electronic-formed invoicing most definitely brings with it additional benefits in relation to compliance and the fight against tax evasion and fraud. The new VAT imposition in Saudi Arabia and the painted cloud of conversion from manual invoicing to electronic invoicing is a clear message to the Saudi nation that its financial systems need a modern way of operation apart from transparency and efficiency alongside resource mobilization.
Here are some of the FAQs on VAT in Saudi Arabia (KSA).
1. First, what is VAT in Saudi Arabia.
Value Added Tax (VAT) is a hidden form of consumption tax levied upon the goods and services procured by the end consumer. Saudi Arabia ratified VAT on January 1, 2018, as a part of the 2030 Vision of the Kingdom. The reason behind this tax imposition was to introduce the concept of flowing revenue from oil to a healthier economic platform. The standard rate for VAT as applied in Saudi Arabia is 15% as of July 1, 2020, up from a 5% rate, which was the initial rate in 2018.
VAT is levied on most goods and services, with businesses registered for VAT have an obligation to collect the tax on behalf of the customers and forward the value to the Authority for Zakat and Taxation (GAZT). This will increase the non-oil revenues and help in funding the government services and infrastructure projects.
2. Who is required to register for VAT in Saudi Arabia?
If the taxable turnover of any business in Saudi Arabia goes beyond the framework of mandatory registration, that business should register for VAT. Currently, the registration threshold is SAR 375,000 concerning yearly taxable sales; however, all businesses with yearly taxable sales between SAR 187,500 and SAR 375,000 may register voluntarily if they so wish. Registration therefore is not required for businesses whose taxable turnover is less than SAR 187,500, but on paper, if they wish, they may put forward their registration.
Newly established businesses are required to register for VAT when they expect that taxable sales will reach the threshold within their first 12 months of existence. To avoid penalties for non-compliance, imperative for business owners is tracking sales to determine whether VAT registration is necessary.
3. What is the VAT rate in Saudi Arabia?
The standard rate of VAT in Saudi Arabia is 15%. Nevertheless, there are some goods and services which are either exempt or have a reduced rate. Such as a given list of goods and services shall be exempt from VAT or taxed at the 0% VAT rate:
Basic food items
Services, pharmaceuticals, and medical services
Educational services
Certain financial services
With an exemption, VAT doesn’t have to be collected from exempt goods and so businesses won’t be able to recover VAT on any of their business expenses related to offering those activities. On the other hand, if something is taxed at the rate of 0% VAT, businesses can still reclaim VAT in terms of the input tax, as the invoice still is considered a taxable transaction.
4. Penalty for VAT Levied on Businesses in Saudi Arabia
Registered businesses should perform VAT in Saudi Arabia and charge VAT on their sales, if deemed taxable transactions. Considerate that VAT should be a part of the price for a purchase, the VAT itself is supposed to be collected by a charge over the invoice. In return, the business collects the VAT from the customer and files it with the GAZT. As per invoicing, businesses should indicate what proportion of the final price accounts for VAT as clearly as possible. Their VAT calculation appears in detail: rate times the base in order to deduce the total VAT amount. They must therefore assure their VAT-registered receipt with all the requisite information, such as VAT registration number, VAT rate, and total VAT amount.
5. How Is VAT Paid and Reported?
VAT registration processes therefore exist for all businesses that require it. They need to submit their returns digitally with the GAZT. Returns might be submitted quarterly or monthly depending on business size.
The VAT return is a summary of total sales and VAT levied and total purchases and VAT paid on expenses before payment. The company must pay the net VAT charges, which are VAT charged to customers less VAT paid on purchases. The business collectively owes a VAT refund when it has paid more VAT on purchases than collected via sales.
6. What do non-compliance with VAT regulations look like in terms of penalties in Saudi Arabia?
Non-compliance with these regulations would make you liable to penalties. These penalties could include fines and interest on unpaid VAT and, in addition, other disciplinary measures. Penalties usually concern business operations that are non-compliant, and those may include the following:
Non-registration of VAT: SAR 10,000 penalty on all businesses that have failed to register when required.
Error in charging VAT on invoices: SAR 5,000 by a business, your fine for each wrong invoice issued.
Late filing of VAT returns: A penalty of 1% of the unpaid VAT amount per each month of default.
Underestimated VAT: A penalty of 50-100% of the under-estimated VAT amount.
To avoid these penalties, it is in the best interest of all businesses that, at the start, records are appropriately maintained and all registrations are adequately maintained at all times. The reporting and accounting part of the transaction must be strictly considered.
VAT refund is essentially when all the conditions meet the intended charge, so actually, the company receives more VAT in input than it pays in output. The procedure of claiming the VAT refund thus amounts to applying for the refund with the General Authority of Zakat and Tax; the GAZT will review the application for final sanction at the end.
What is the refund of VAT, and for whom is this refund rendered?
In Saudi Arabia, the VAT refund is made under certain conditions. If the input VAT (VAT paid on purchases) is such that it exceeds an output VAT (VAT collected on sales), this proportion makes it eligible for refund. A refund is obtained by making an application to the GAZT – the Saudi tax authority, followed by approval by same for the refund after review.
Equally, a business whose activities are determined to be zero-rated-for example, export-can claim refunds on the VATs paid on purchases in relation to the activity. Therefore, businesses are expected to keep proper records of sales and purchases if they want to claim a refund on VAT.
Can VAT be claimed after the occurrence of expenses with Saudi Arabia businesses?
Yes, VAT paid by businesses who are registered for VAT against expenses which mainly revolve around the business can be refunded. This refund is called an “input VAT.” An input VAT is deducted from the output VAT (VAT collected from customers) when VAT returns are returned. Wherein the input VAT exceeds the output VAT, then the businesses may be eligible for the grant of VAT refunds.
However, there are restrictions as to the reclamation of VAT. VAT cannot be reclaimed on items used in respect of exempt goods and services, such as financial services of a specified class, residential rent, and specific medical and educational services.
The impact of VAT on foreign businesses operating in Saudi Arabia?
Apart from registering a business for VAT, When it is mandatory under Saudi regulations, a business that is not Saudi-owned needs to also comply with the third-party VAT regulations. In this context, third-countries need to register for VAT if they provide taxable goods and services in Saudi Arabia or the payment reaches the mandatory registration threshold.
As for businesses serving cross-border activities, like the export of goods from Saudi Arabia, they benefit a lot from the zero rate of VAT. They can thus sell goods or services to overseas clients without charging VAT while also being able to request a refund for the VAT from their local purchases.
Where does the exemption of VAT stand as far as small businesses are concerned?
Small business operators with VAT-applicable sales below SAR 187,500 do not need to register for VAT in Saudi Arabia. These are classified as “small businesses” and are therefore exempted from VAT obligations. However, if the business voluntarily registers for VAT, it must comply with all VAT requirements, including charging VAT from any purchases and filing VAT returns.
Even if they’ it is not regaling d for VAT at present, these small businesses are recommended to keep their records properly so that they might be able to shift easily into VAT provisions once their sales surpass registration thresholds.
Conclusion
In Saudi Arabia, VAT is now utterly synonymous with the country’s economic layout and its contribution to the diversification of the revenue mix required for the accomplishment of the objectives pre-2030. The government-imposed VAT at a standard rate of 15% for most goods and services-a system that promotes transparency and business participations, abets the country’s fiscal goals, and urges businesses to comply with VAT rules and regulations. This includes registration and collection of VAT, the submission of accurate VAT returns, and provides for penal provisions discretion in the case of noncompliance in VAT.
The introduction of e-invoicing in Saudi Arabia has further streamlined the process, reduced administrative burdens and improved accuracy. E-invoicing in Riyadh, as well as across the Kingdom, helps businesses issue, store, and manage invoices electronically, ensuring compliance and minimizing errors. This digital shift not only makes VAT reporting more efficient but also helps combat tax fraud and evasion, strengthening the nation’s overall tax system.
This evolution of VAT in Saudi Arabia suggests that local and foreign companies must frequently monitor changes within the regulatory framework and deliberate changes in technology like e-Invoicing. If business houses embrace these contemporary changes, they will operate far more profitably and in tune with the country’s economic growth. Saudi Arabia is positioned for the auspicious realization of its fiscal and developmental objectives within a strong VAT framework and bolstered by e-Invoicing, together with transparent and tax-efficient operation.