What you need to know regarding VAT in Saudi Arabia.
All the basic information you need to know about Value Added Tax in KSA
What is VAT?
VAT is an acronym for Value Added Tax. It is an indirect tax that is enforced on all products and services. These are the products and services that are acquired and sold by businesses. VAT can be imposed in different levels of the supply chain. The standard VAT rate is 15% for most products and services. Some reach up to 15%. However, there are also a few exceptions to VAT imposition.
As of now, there are more than 160 countries worldwide that implement VAT. It is considered a state- sanctioned way to reliably get funds for government budget plans. In the Kingdom of Saudi Arabia, VAT is supervised by the General Authority of Zakat and Tax or GAZT. VAT was first implemented in the KSA last January 1, 2018. VAT is then submitted via an online portal and can be paid via internet banking of a local KSA bank.
What are the products and services that are under the VAT law?
Many sectors are already subject to VAT. These particular sectors are: foods, beverages, real estate, transportation, healthcare, education, oil, oil derivatives, and gas sectors.
For the foods and beverages sector, the standard VAT is already at 15%
For the real estate sector, there are 5 sub-sectors with differing VAT rates. The selling of real estate properties that are either commercial or residential is subject to 5% real estate transactional tax. The selling of real estate properties that are used would be subject to the same real estate transactional tax at 5%. When a citizen is buying his or her first home or residence, the government would be the one to shoulder the real estate transactional tax. The government will bear the tax of residences bought at a maximum price of SAR 1 million. If a citizen is just renting a residential real estate property, the property is free from paying VAT as well as the real estate transactional tax. If a citizen is leasing a real estate property that is commercial, the VAT would be at 15% but will not be subjected to real estate transactional tax.
For the transportation sector, the domestic transportation has a VAT of 15%. International transportation, meanwhile is charged at a zero rate. There is also no VAT placed on other transportation sub-sectors, such as transportation services for products and passengers outside the KSA, the supply of a means of international transport with some specifications, and the supply of maintenance, replacement parts, consumables, and repair for certain transportation vehicles.
For the healthcare sector, the public healthcare sub-sector would be outside the range of the VAT law. On the other hand, the private healthcare sub-sector would be subject to 15% VAT. There is a list of medical equipment and medicine that is made by the SFDA and the KSA Ministry of Health. If a person’s medicine or medical equipment is included in the list, there would be no VAT placed upon it. For citizens who are recipients of private healthcare services, the government will be the one to shoulder the VAT.
For the education sector, the public education services sub-sector would be outside the range of the VAT law. Meanwhile, the private education services sub-sector would be subject to 15% VAT. For private education services for Saudi nationals, the government will be the one to shoulder the VAT.
For domestic oil, oil derivatives, and gas sectors, their products and services supply chain would be subject to 15% VAT.
In simple terms, how does VAT work?
VAT is applied for every step of the supply chain. It does not just apply at the beginning, with the manufacturer, or at the end, with the end consumer. Even the middle processes are also subject to VAT. For example, a business in the KSA buys raw materials so it can manufacture some products. The seller of the raw materials will put 5% on top of the selling price to account for the VAT. The 5% collected will then go to the government. After manufacturing, the business decides to sell the products to someone. Let us call him Buyer A. The business would have to put 5% on top of the selling price to again account for the VAT. The 5% would then go to the government. Since the business paid 5% on the supply chain earlier when it bought from the seller of raw materials, the money would be refunded back to the business. The same happens if Buyer A decides to resell the product to the end consumer. Buyer A will add an additional 5% to the selling price. The 5% will go to the government. The government will then give Buyer A back the money he paid earlier when he bought from the business.
Which businesses have to file for VAT?
Not all businesses under the relevant sectors have to secure a VAT license. Thus, not all businesses would ask for 5% on top of the selling price of their products and services. There are businesses that may or may not opt in to register under VAT and implement it. There are also businesses that are required to register under VAT and implement its rules and regulations.
Which kinds of businesses are required to file for VAT?
The businesses that are required to file for VAT are those with revenues of more than SAR 375,000 a year. The total income is computed by adding all the income generated by the business in the last 12 months. This can also apply if the projected income of the business for the next 12 months exceeds SAR 375,000.
Which kinds of businesses can opt in to file for VAT?
There are businesses that have the option to file for VAT or not. These are businesses with a total income of SAR 187,500 to SAR 375,000 generated in the last 12 months. This can also apply to the projected income of the business for the next 12 months.
Registering under VAT is also only optional for businesses with a total income that exceeds SAR 375,000 but is only generating zero-rated products.
This article is written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of its contents.