Saudi is the world’s largest oil exporter and has the largest economy in the Arab region. But following the 2016’s budget deficit of $97 billion, the government had to impose a wage freeze on civil servants, minister’s salaries were cut down, and many building projects put on hold.
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Not only that, unexpected cuts were made to fuel and utility subsidies. In a country, where residents had long enjoyed a tax-free and heavily subsidized existence, they were introduced to the International Monetary Fund (IMF)-backed value-added tax (VAT) on January 1, 2018.
A 5% tax is imposed on most goods and services, which is aimed to boost revenue.
Introduction of VAT in Saudi Arabia
The primary purpose of introducing VAT in Saudi Arabia is to increase revenue from its non-oil sector. Although the timing of tax-based reforms doesn’t seem favorable due to the prevalence of deflationary situation in 2017, they are relying on the benefits of reforms to be effective in the long-run.
Dr. Hussain Abusaaq, Chief Economist and Head of Research, KPMG Al Fozan & Partners, has said in an interview that the economy price deflationary seen at the beginning of 2019 is expected to remain for the rest of the year before it begins to normalize in 2020.
Besides, all of it had a moderate impact on small and medium-sized enterprises (SMEs) due to high compliance costs. However, to assist them, the government introduced the ‘Private Sector Stimulus Plan’ to eliminate any potential hurdles and improve private sector confidence.
In response to that, several initiatives have been established, such as indirect lending to SMEs, raising the capital of some existing programs (Kafalah), and returning government fees.
Rate of VAT in Saudi Arabia
The 5% levy is applied to most goods and services. The rate structure of VAT in Saudi Arabia is as follows,
i. Taxable Goods With A 5% Rate: Includes commercial sale and rent of property, food and beverages, clothes, utility bill, etc.
ii. Taxable Goods With 0% Rate: Includes supplies within customs duty suspension zones; supply of medical equipment and medicines as specified by the Ministry of Health and the Saudi Food and Drug Authority (SFDA); exports of goods or services outside the Gulf Cooperation Council (GCC); International transport services of goods or passengers; supply of gold and silver for investment purposes.
iii. Tax Exempted List: Includes life insurance; residential real estate leases; financial instruments; providing credit or credit guarantee for customers; operation of current, deposit and savings accounts’ interests on loans, credit or debt security.
iv. Out of Scope: Includes services by government agencies or public authorities, such as public education, public healthcare, the issuance and renewal of passports and driving licenses, etc.
Registration of Businesses Under VAT in Saudi Arabia
The VAT in Saudi Arabia got implemented on 1st January 2018. Thus, the businesses are supposed to be VAT compliant by following and implementing guidelines as prescribed in the Saudi Arabia VAT law and regulations.
The first step to be VAT-compliant is to register under VAT. Yet again, not all businesses in Saudi Arabia are required to register. The law regulation in Saudi Arabia defines a threshold for VAT registration based on the annual value of goods made or expected to be made by the company.
Based on this threshold, the registration is classified as follows,
- Mandatory VAT Registration
- Voluntary VAT Registration
- Exemption from VAT Registration
1. Mandatory VAT Registration
- Those businesses who have a residence in Saudi Arabia and the taxable supplies value exceeds SAR 375,000 in the preceding 12 months need to register under Saudi VAT mandatorily.
- Businesses not having a residence in Saudi Arabia have to register under VAT irrespective of the registration threshold.
- Registration is compulsory for companies having a residence in the Kingdom and anticipates that the yearly value of supplies to be made in the next 12 months will exceed the threshold of SAR 375,000.
A non-resident should appoint a tax representative who is approved by GAZT.
2. Voluntary VAT Registration
Basically, voluntary registration is an optional registration for individual businesses in Saudi Arabia.
- Businesses who have a residence in the Kingdom of Saudi Arabia and their taxable supply value exceeds SAR 187,500 but not SAR 375,000 in the preceding 12 months.
- Those businesses with a residence and anticipates to exceed the suppliable amount to SAR 187,500 but not exceeding SAR 375,000.
These businesses are allowed to register; however, the registration is optional. They can register if they choose to do so. But being registered under VAT in Saudi Arabia offers certain benefits, such as it allows the deduction of input tax.
3. Exemption from VAT Registration
- Businesses who deal in zero-rated supplies and their value of annual supplies made in the Kingdom exceeds the mandatory registration threshold are exempted from the compulsory registration, though they may choose to register voluntarily.
It’s important to note that without registration, companies can’t charge VAT on the supplies, collect, and remit it to the government. Furthermore, by being registered, businesses can recover the Input VAT before remitting the VAT payment.
Benefits of VAT Registration in Saudi Arabia
i. Issue Tax Invoices
Firstly, only a registered business can issue tax invoices for supplies made. And secondly, a registered business can recover input tax only on purchases from registered businesses.
So naturally, businesses would prefer to do registered companies so that they can issue tax invoice and recover input tax on supplies later. That’s why it has become necessary to register a business to make sure that registered businesses continue to purchases from them.
ii. Refund of VAT paid to make zero-rated supplies
There are certain goods and services such as supplies of medical equipment and investment details, exports of services, etc., that fall under the zero-rated VAT category.
Only registered businesses can apply for a refund of VAT paid on purchases used to make the zero-rated supplies. Thus, a certified business dealing in zero-rated supplies can benefit by obtaining a VAT registration. It will help them reduce the costs of making such supplies.
iii. Avoid fines for not registering
Businesses who haven’t registered within the specified period is liable to pay a hefty penalty of SAR 10,000. Besides, a small business always needs to keep a tab on their turnover to see if it is crossing the threshold limit for registration. If the business’s turnover crosses the threshold limit of SAR 375,000 and is not registered, it may be subjected to pay enormous fines for not registering.
On the other hand, a registered business doesn’t need to worry about crossing the threshold limit.
Filing return of VAT in Saudi Arabia
The frequency of filing returns depends on the types of business.
- Business with taxable supplies exceeding SAR 40 million need to file their return monthly
- Business with taxable supplies up to SAR 40 million can do quarterly
The filing of VAT and payment of tax is due until the next month of the end of a month/quarter (as applicable).
Businesses need to ensure compliance right from the recording of transactions to the filing of accurate returns and reporting periodic statements to the authorities. Everything needs to be compliant with VAT rules and regulations. It’s important for businesses in Saudi Arabia to set up and get familiar with the provisions of VAT and prepare accordingly.
Saudi Arabia released its final Value Added Tax (VAT) law on 28th of July 2017. It is available on the website of its official Gazette. Here are a few main highlights of the article,
- Article 53 states that all people liable to register for VAT shall register with the General Authority for Zakat and Tax within 30 days from the date of issuing the law.
- Article 41 states that businesses who fail to apply for the registration within the specified period will pay fine of SAR 10,000.
- In accordance with Article 2 and the GCC VAT Framework Agreement, all imports into and supplies of services and goods in Saudi Arabia will be subject to VAT.
- By Article 21, VAT will be considered to be due if an invoice is issued or paid before the implementation or registration date. Still, the actual supply of the services and goods is after or on the implementation or registration date.
Apart from that, there are a few other activities that every business has to perform under VAT in Saudi Arabia,
- Review business processes and policies to ensure that the pricing, invoicing, procurement, etc. is in alignment with VAT rules and regulations.
- Educate vendors, employees, stakeholders, and customers about VAT and its impact.
- Furnish correct information for the filing of returns in an accurate manner on a quarterly or monthly basis, as applicable.
- Maintain records and accounts and issue invoices in the prescribed manner and format.
- Correctly calculate the tax due and input tax deduction and payment of tax due on a monthly or quarterly basis.
Implementation of VAT in Saudi Arabia is an excellent opportunity for businesses to capitalize on the new business environment.