VAT Basics – KSA

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KSA -E- Invoice

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.

I cannot give you the formula for success, but I can give you the
formula for failure. It is: Try to please everybody.
– Herbert Bayard Swope

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. 

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