VAT Basics - KSA
The Kingdom of Saudi Arabia introduced Value Added Tax (VAT) on January 1, 2018. VAT is an indirect tax imposed on all goods and services. This guide is meant to educate readers about VAT in KSA and familiarise business owners and consumers with the concepts involved.
This section will cover the following topics
- What is VAT?
- How the VAT mechanism works
- Businesses eligible for VAT
- VAT registration
- Taxable and non-taxable supplies
- Records and bookkeeping
- Credit notes
- Debit notes
What is VAT?
Value Added Tax is imposed on supplies of goods and services made inside the country, with a few exceptions. VAT is applied at different stages of the supply of a product or service. The General Authority of Zakat & Tax (GAZT) has a standard VAT rate of 5% for the supplies of most goods and services.
How the VAT mechanism works
A registered business in the KSA that procures raw materials for manufacturing a product will pay an extra 5% of VAT on top of the selling price. The seller will collect this 5% VAT and will account for it later to the government.
- The tax paid to the seller for the sale of raw materials is called output VAT.
Then the registered business will sell this manufactured product to a consumer, who’ll pay an additional 5% of VAT on top of the finished item’s selling price.
- The tax paid by the consumer to the registered business for the supply of the product is called input VAT.
Let us look at an example.
Woodcraft, a furniture manufacturer sells furniture to a wholesaler Salim & Co for a selling price of 10,000 SAR. The VAT system requires Woodcraft to charge 5% VAT (500 SAR) on behalf of the government. Salim & Co pay a total amount of 10,500 SAR.
Now Salim & Co set a new selling price (15,000 SAR) for the furniture and sell it to a retailer Desert City Furnitures. They also charge 5% VAT (750 SAR) for the supply. They will remit this 750 SAR to the government and receive a refund for the 500 SAR of VAT that they paid to Woodcraft in the first step. Desert City Furnitures will pay a total of amount of 15,750 SAR.
Desert City Furnitures increase the selling price of the furniture to 20,000 SAR and sell it to the end consumer. They also charge 5% VAT (1,000 SAR) on behalf of the government and receive a refund for the VAT paid to Salim & Co in the previous step. The customer pays a total amount of 21,000 SAR.
At every step of the supply, VAT is imposed and the registered businesses receive refunds or tax credit for the VAT paid in the previous step.
Businesses eligible for VAT
- Taxable businesses (mandatory):
All businesses exceeding a revenue of 375,000 SAR through taxable sales in the past twelve months (or expected taxable sales in the next twelve months) must register, collect tax, and file returns for VAT. In 2018, businesses exceeding a revenue of 1,000,000 SAR through taxable sales in the past twelve months (or expected taxable sales in the next twelve months) should register, collect tax, and file returns for VAT.
- Taxable businesses (VAT optional):
Businesses with a revenue between 187,500 - 375,000 SAR through taxable sales in the past twelve months (or expected taxable sales in the next twelve months) can choose not to register for VAT. If a business has a revenue exceeding 375,000 SAR, but makes only zero-rated supplies, then VAT registration is optional.
Registration for non-residents of KSA:
- Non-residents of KSA making taxable supplies inside the country are required to register and file returns for VAT. This can be done by appointing a tax representative based in KSA. This GAZT-approved tax representative submits VAT returns and makes payments on behalf of the non-resident taxpayer. The tax representative and the taxpayer will both be held accountable for any unpaid VAT.
- Under KSA VAT, two or more legal persons can register for VAT as a group using GAZT’s electronic application form.
To be eligible to register as a group:
All of the legal entities in the group should be controlled, or at least 50% owned, by the same individual or individuals.
All the group members must perform an economic activity
All the group members should be legal residents of KSA
At least one of the group members should meet the threshold conditions for VAT registration
Taxable and non-taxable supplies
Standard-rated supplies: All supplies of products or services made inside the KSA are eligible for the standard VAT of 5% unless they are marked as exempt or zero-rated. Some examples of standard-rated supplies include:
Food and beverages
Private healthcare and educational services
Rent and sale of commercial buildings
Sale of residential buildings
Exempt supplies: Goods and services that are specified as exempt are not subject to VAT. The supplier of exempt goods or services should not register for VAT, collect, tax or remit it. Examples of exempt goods and services include:
Residential rent (leasing and renting residential property)
Certain financial services
Zero-rated supplies: Zero-rated supplies are taxed at VAT rate of 0% and include:
Medicines and medical goods
Investment metals (gold, silver or platinum having a purity level of 99% or higher)
Check out our guide to VAT rates of goods and services to learn more.
Records and bookkeeping
Registered businesses and individuals in KSA should maintain their relevant records, bills, invoices, and all other documents related to a transaction for at least 6 years after the tax period in which the transaction occurred. The records should be stored inside the country as physical or electronic documents. This rule applies to non-resident taxpayers too.
An invoice is a non-negotiable document which a business issues to its customers containing the details of the supply. In the KSA, VAT-registered business owners must issue their invoices by the fifteenth of the month following the month when the actual supply was made.
Check out our VAT invoicing guide to learn more.
A credit note is a document sent by a business to its customer, informing them that they are eligible for credit. Credit notes can be issued:
when products are returned for a refund
when an invoice amount has been overstated
when the business collects more VAT from the customer than the correct amount
A debit note is a document issued by a business to its customer, informing them that they owe additional money. Debit notes can be issued:
when the business collects less VAT from the customer than the correct amount
when the business delivers extra goods to the customer
when the business has undercharged for goods that were already delivered