Input VAT and Output VAT in Saudi Arabia

Updated on: Nov 30th, 2023

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9 min read

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Saudi Arabia introduced Value Added Tax (VAT) at 5% w.e.f January 2018. After that, the Zakat, Tax and Customs Authority (ZATCA) increased the VAT rate to 15% w.e.f 2020 to combat the consequences of COVID-19. Businesses must understand the VAT concept in detail to implement it better. Especially the concepts that will impact their cash flows, such as input VAT and output VAT.

This article explains in detail input VAT and output VAT, the differences between them, the impact on net VAT liability, output VAT reconciliation, etc.

What is input VAT?

As the name implies, it is the VAT paid on inputs. The VAT a business pays on the goods purchased or services utilised is called input VAT. Further, VAT paid on capital goods, such as machinery, office furniture, etc, falls under input VAT.

A business possessing a valid purchase invoice can claim the input VAT and offset it against the output VAT. Therefore, it allows the business to pay VAT only on the portion of profit it added to that particular product or service.

What is output VAT?

This is the VAT paid on sales, i.e., outputs. The VAT a business pays on selling goods or services is called output VAT. 

Businesses add VAT to the price of goods or services when they are selling them to customers. Once they charge the output VAT, they can deduct qualifying input VAT from it and then pay off the net VAT liability.

Overall, the business is collecting tax on behalf of the government. Any failure to do so attracts penalties or other legal actions from ZATCA.

Input VAT vs output VAT

Here are a few differences between input VAT and output VAT:

S.No

Input VAT

Output VAT

1It is paid on the purchasesIt is paid on the sales
2It is paid to the vendor/supplierIt is collected from the customers
3Input VAT is mentioned in the purchase invoice Output VAT is mentioned in the sale invoice
4Eligible to be deducted from output VAT (with exceptions)Must be collected on behalf of the government
5Any discrepancy will result in a loss of VAT paid to the vendor/supplierAny failure to collect from customers will result in notices and penalties.

How does input and output VAT decide net VAT liability?

Net VAT liability is the difference between the output VAT and output VAT.

Usually, businesses will have many transactions with varying input and output VAT amounts. Hence, they must add all the VAT charged on sales and deduct the qualifying VAT paid on purchases.

There can be three scenarios for a business while arriving at net VAT liability:

S.No

Scenario

Action to be taken by business

1Input VAT is less than output VATPay the net VAT liability to the government
2Input VAT is more than output VATCarry forward the excess input VAT or claim a refund
3

Input VAT is equal to output VAT

(This scenario is highly unlikely)

No action needed

Is it mandatory to reconcile output VAT?

Yes, with the introduction of e-invoicing in Saudi Arabia, businesses must reconcile output VAT before filing the VAT returns. This reconciliation ensures accurate reporting in VAT returns and helps businesses avoid future notices/penalties.

How to do output VAT reconciliation?

The businesses must 

  • Gather relevant information from e-invoices
  • Add the data to an Excel or reconciliation solution
  • Compare the output VAT recorded in e-invoices with the sales register
  • Check for any differences and make necessary adjustments

Click here to learn how to do VAT reconciliation in Saudi Arabia.

 

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