As a significant tax introduction of Value Added Tax (VAT) happened in Saudi Arabia, the incidence created much curiosity. Although the VAT is charged at a single rate of 15% on the sale of goods and services for consideration, it requires specific basic knowledge to understand the whole mechanism. The standard rate has been recently increased from 5% to 15% by ZATCA.
This article explains the basics of VAT that will give you an overall picture of how VAT is charged, how the input tax is deducted, along with VAT return requirements, and many more.
Individuals or legal persons carrying economic activities are required to be registered under KSA VAT. However, all KSA residents must register under VAT if their annual turnover of the taxable supplies in the last 12 months exceeds SAR 375,000.
Economic activity is considered carried out regularly, including commercial, industrial, agricultural, or professional activities.
As explained below, the supplies under KSA VAT are categorised as zero-rated supply, taxable supply, and exempted supply.
|Types of Supply →||Zero-rated||Taxable||Exempted||Out of Scope|
|Explanation||Supplies that are charged at 0%||Supplies that are charged at a standard rate of 15% (earlier 5%)||Supplies that are declared explicitly as exempt from VAT||Supplies that are kept out from the purview of VAT|
|Rate||0%||15%||Exempt||Out of Scope|
|Example||Passengers and goods being transported internationally||Renting out commercial buildings||Renting out residential buildings||Supplies that are made without considering it as economic activity|
|Taxability||Taxable||Taxable||Not Taxable||Not Applicable|
|Input Tax Credit||Available||Available||Not available||Not Applicable|
Under KSA VAT, the input tax means the tax already paid on the purchase or import of supplies for manufacturing the taxable goods or performing taxable services.
A taxable person can claim such tax already paid on the purchase of goods if he utilises them to make taxable supplies.
For example, when a colour paint manufacturer buys powder colour to manufacture the paint, he will pay VAT to purchase the raw material. He can claim the input tax credit of the VAT paid on the powder colour fulfils (raw material) purchased while filing the return for the VAT chargeable on paint (final product).
VAT records contain VAT calculations and details of input and output tax, including books of accounts. The VAT implementing regulation requires the VAT records must be kept in the Arabic language.
Below is a comprehensive list but not exhaustive of what the VAT records should include:
While the standard method prescribed under the KSA VAT Law is the Invoice Accounting Method to report input and output VAT, two special schemes can report VAT and deductible tax.
This scheme applies to small businesses with turnover equal to or less than SAR 5 million. The scheme caters to small businesses with ease of maintaining the cash flow and helps reduce the administrative work relating to reporting and recording output and input VAT.
The scheme applies to used goods. The ZATCA allows the application of VAT using this method only on the profit margin on the sale of used goods. To use the scheme, the taxable person will have to apply to ZATCA if he fulfils the following conditions:
VAT returns are a self-assessment of a taxable person’s net tax liability for a particular tax period. Filing of VAT returns in KSA is mandatory for all VAT registered entities and persons.
Taxable persons having an annual turnover of more than SAR 40 million must file monthly VAT returns. For taxable persons whose annual turnover is up to SAR 40 million, taxpayers can file the VAT returns quarterly. The VAT returns should be submitted online to the ZATCA.
When a taxable person disagrees or objects to an assessment issued by the ZATCA regarding any error in VAT return or any other document, he has a right to appeal in the evaluation to submit an objection.
Appeals are the rights given to the taxpayers to explain their actions and methods to the ZATCA. However, the taxable person must make such an appeal within 30 days of receiving an assessment notification. Otherwise, the assessment will be considered final.
Whenever there is any violation of any rules or regulations, the authority has a right to impose penalties and fines on the taxable persons. It can also decide the level of penalty or fine based on the behaviour and the cooperation received from the taxpayer.
Below list explains the nature of the offence and its related penalties:
|Nature of Offence||Penalty or Fine|
|Submitting false documents with an intent to evade the VAT or illegally obtaining a VAT refund||At least the VAT amount due and up to thrice the value of goods or services|
|Incorrect submission of a VAT return or amendment in a tax return resulting in the lower amount due||50% of the difference between the calculated tax and VAT due|
|Failure to register under VAT||SAR 10,000|
|Non-submission of VAT return||5-25% of the VAT due|
|Non-payment of VAT||5% of the VAT due per month|
|Charging VAT without getting registered||Up to SAR 100,000|
|Failure to maintain books and records||Up to SAR 50,000|
|Preventing ZATCA employees from performing their duties||Up to SAR 50,000|
|Violation of any other provision of VAT law||Up to SAR 50,000|
For the offences incurred a second time, the authority may double the fine or penalty if the offence is made within three years of issuing the final decision.
Although VAT looks a bit lengthy or complicated, it is pretty straightforward with a simple application. ZATCA’s Knowledge Center provides video tutorials, guides and instructions, FAQs, Zakat Academy, and many more for the smooth implementation of VAT.