VAT effect on businesses in Saudi Arabia

Value Added Tax (VAT) has been introduced in Saudi Arabia for the first time in 1st January 2018 (H1439/4/14).

By implementing VAT a 5% (One of the world lowest VAT percentage) levy is being applied to the majority of goods and services. Petrol and diesel, food, clothes, utility bills and hotel rooms all now have VAT applied. But some exempt from the tax, or given a zero-tax rating, including medical treatment, financial services and public transport.

In Saudi Arabia more than 90% of budget revenues come from the oil industry. The governments want to increase revenue in the face of lower oil prices.

How does VAT affect your business?

Businesses need to determine the actions to be taken on contractual arrangements, processes, and systems before implementation. As across all departments business functions such as supply chain, cash flow, procurement and invoicing will be affected along with the financial impact of staffing and accounting processes.

IT infrastructure has to be procured or adjusted to align business processes enabling VAT coding of accounts payable and receivable transactions with internal controls that are compliant with VAT laws and regulations.

Contractual arrangements with vendors and customers have to be reviewed and updated for each party responsible for paying and accounting for tax.

All future VAT liabilities and compliance obligations should be determined by mapping the transactions

Hence before the end of this year 2017, it is highly recommended to develop a roadmap for resource planning and identifying the job on hand to submit returns in 2018.

Companies checklist for VAT Readiness in Saudi Arabia:

Have a focal point to determine the chart of accounts of goods sold as per tax policies of the VAT.

Procurement & inventory management should record and archive all invoices along with a recording of tax details of suppliers for the refund.

Point of sales should display goods price and sales receipt must comply with tax requirements while recording sales.

Keeping a general record of accounting along with calculating VAT balance for both paying and refund after filling.

What if companies don’t comply with law and regulations?

There will be a fine of 10,000 SAR if any company fail to register for tax before the deadlines (Art. 41. Also, failure to submit a tax return within the specified period can be fined up to 25% of the total tax due amount (Art. 42(1); failure to pay the tax due by the deadline will be fined at a rate of 5% per month (Art. 43).

A non-registered person who issues a tax invoice can be fined up to 100,000 riyals (Art. 44); failing to keep proper record or holding them from the authorities can be fined up to 50,000 SR (Art.45)