VAT, most of you will be familiar of this term, you hear about it every where like social media, newspaper and television. This blog post will drive you through the VAT basics and how it is calculated and how will it impact on your business. Lets start with understanding the basics of VAT.
What is VAT?
TAX is the fee charged by the government on workers’ income or business profits or added to the cost of some goods, services and transactions which goes to the state revenue. there are two types of TAX, direct and indirect.
DIRECT TAX is paid directly by the taxpayer e.g income tax while INDIRECT TAX is paid to the government by a medium which collects the tax on behalf of government from the taxpayer e.g sales tax and VAT.
So VAT is indirect tax, charged by the government on goods and services purchased by the person and this tax is collected by the intermediate that is the seller of the goods and services who then pays the tax money to the government.
HOW IT WORKS?
A value added tax is applied at every stage of the sales process, and the registered business receives a refund (or tax credit) on the VAT paid at the previous step. The general authority for zakat and tax (GAZT) has specified a fixed VAT rate of 5% for the sale of goods and services in the KSA.
VAT is applicable at every stage of sales and production unlike other taxes which are applied on the whole value of the product and service. VAT is destination based that means it depends on the location of the recipients and it is also applied on imports and exports of goods.
WHY VAT IS INTRODUCED?
The KSA delivers excellent public services, including healthcare, education, public transportation, and social services. The introduction of a VAT will allow the government to diversify their sources of income and continue to ensure a good standard of living for KSA residents.
FEW VAT TERMS:
TAXABLE SUPPLY refers to transferring goods or services between two or people or businesses where at least one of them is a registered taxpayer. It includes sales, purchases, imports exports and intra GCC stock transfers.
TURN OVER is the sum total of your taxable supplies, the goods and services imported by you or the taxable supplies made by the businesses acquired by you.
INPUT CREDIT/ VAT CREDIT this is equal to the amount of tax paid by purchasing goods and services
TAX LIABILITY this is the amount of tax you owe to the government based on the transactions you carry out on a particular tax period.
REVERSE CHARGE this refers to the transactions where buyer of the goods and services is in charge of paying the tax to the government on behalf of the seller.
VAT RATE STRUCTURE FOR KSA:
it is broadly classified into exempt supplies and taxable supplies. Taxable supplies are further classified into zero rate (0% VAT) and standard rate (5% VAT).
Exempt supplies includes residential rents and rent for housing for students and certain financial services are not imposed to pay VAT.
Zero VAT rate is applied to following goods and services:
- exports made outside GCC
- services provided under international passengers transport
- vehicles and equipment used for international transportation
- investment in certain precious medals with purity equal to or greater than 99%
- medicines and medical equipment issued by ministry of health KSA
All other goods and services which are not included in exempt and zero rated VAT category are grouped under standard tax rate of 5%.
WHO SHOULD REGISTER UNDER VAT:
All companies and business or entities which make an annual taxable supplies of goods and services about 375000 SAR are legally required to register for VAT with the general authority of Zakat and tax. This mandatory registration threshold is calculated on the basis of taxable turnover either based on the past 12 months or in the 12 months to come. The voluntary registration or optional registration is for businesses which have annual taxable turnover greater than 187500 SAR but less than 375000 SAR. the businesses which have annual turnover of 375000 SAR or more but its revenue is exclusively from exempted and zero rated goods and services are also included in optional registration group. Businesses which have annual turnover of less than 184500 SAR are not required to register for VAT.
Registration process can be initiated by visiting GAZT website which is https://www.gazt.gov.sa/ar, create an account and login into it. Submit relevant information and documents.