10 Rules related to Value Added Tax (VAT) everyone should know in Saudi Arabia

Taxes are an important source of government revenues. The government needs revenues to incur expenditures on defense, health, and education. As the oil prices levied a significant decline: Saudi Arabia had to face a huge budget deficit of $97 billion. It had to freeze its projects and salaries of civil servants and cut down the salaries of ministers. In order to balance its budget and to increase non-oil revenues, Saudi Arabia’s cabinet has approved the VAT measures. The six nations of Gulf Cooperation councils (GCC) shall impose a 5 % Value Added Tax (VAT) on certain goods and services.  The GCC countries have agreed to impose VAT on IMF recommendations to boost the regional growth and to be less vulnerable to oil price shocks. The Value-Added Tax (VAT) shall be levied in Saudi Arabia from 1st of January, 2018.  This will eventually end the prolonged tax-free living in the Kingdom.  Here are some things you need to know about VAT![irp]

1-Does one have to pay VAT on every purchase of Grocery? Well, no. There are certain items that are VAT free. According to the Undersecretary at Ministry of Finance, GCC countries have excluded 94 products from the implementation of VAT. Also, health and education sector do not qualify for VAT implementation. School fees, grocery, and hospital bills shall remain unchanged after VAT imposition: They might change because of price hikes, not VAT.

2-Will airplane fares rise due to VAT? One must wait for VAT implementation to know this. However, the case studies of UK and Singapore show that the airline tickets were exempted from VAT. They have introduced a zero percent VAT rate on passenger transport carries. One may expect similar VAT-free air tickets in Saudi Arabia as well.

3-Will VAT imposition increase cost of living? Well with a 5 % tax imposition, things will get expensive. But the cost of living shall increase for those who would maintain a VAT-zoned basket. The cost of living, after VAT, shall depend upon one’s lifestyle, preferences, and his/her goods basket. Buying things that are under VAT category shall definitely increase the cost of living. According to the Emirates Chartered Accountants Group, one shall not expect a significant increase in one’s cost of living if he/ she buys items exempted from VAT.

4-Are tourists liable to pay VAT? Well yes, tourist will not be exempted from Value added tax in the Kingdom. The goods purchased by them shall be not excluded from VAT zone. If visitors of Kingdom buy non-essential items they shall pay 5% value-added tax. The Ministry of Economy has assured that the burden on consumers would be low as VAT rate is kept intentionally low. However, tourist can expect a tax refund at some point in future, as practiced by other countries.

5-Would other taxes be levied in the Kingdom of Saudi Arabia? One can and cannot expect other forms of taxes in near future to be imposed in Saudi Arabia. The UAE is exploring other tax options to collect more revenues. However, the ministry of Finance has assured that presently UAE is not aiming at levying a Personal income tax. Other possible tax avenues are being analyzed and considered, but it is unlikely that they will be imposed in near future.

6-What if businesses do not implement VAT in Saudi Arabia? Every business with an annual revenue of SR 375,000 or more is required to implement VAT. The government has prolonged thought about VAT implementation in the Kingdom. It has become important to levy VAT. Therefore, businesses will be encouraged to adopt the new tax system. However, the government is still working on defining the fees and penalties to be imposed on violators of VAT-system.

7-When will VAT registration open? The VAT registration is likely to be open from 1st October 2017. As per announcement, the registration for VAT shall be carried three months before VAT implementation. Also, companies in the Kingdom shall be facilitated with online registration program for VAT.

8-When should companies file their VAT returns? The companies across the Kingdom are to file their VAT returns after every three months. The government shall bring forward its e-service for online filing of returns.

9-Do Companies need to have preparation? Well certainly. Before VAT is implemented, companies and businesses shall observe a change in their financial management, their core operating systems, human resource mix, and technology. The advice has been given by the ministry of finance. The businesses need to equip themselves with necessary VAT implementation information. Once VAT gets implemented in the Kingdom, the business shall make sure that their system is modeled according to government reporting and compliance requirements. The companies shall disclose in commercial contracts that the VAT burden can be pushed towards the end consumer of the product. If an organization is producing a taxable good or service, they have to make sure that their billing procedure is equipped to add VAT to its product/service charges. One should be equipped with an IT system that is capable of adding VAT to all the invoices. The businesses shall be prepared to implement the tax, once announced by the state.

10-Is VAT imposed on non-essentials? VAT will be levied on non-essential items such as electronics, home furnishings, and other non-essentials. The consumers must pay a 5% tax while buying such products/services. In some cases, such as white products, manufacturers may partially absorb the tax to make their product competitive, yet consumers must pay more than before.

11-VAT on House Rent: It has been declared by the official Value Added Tax (VAT) Twitter account that there will be no VAT on the House Rent.

In order to avoid any problem afterward, they shall be equipped with technology and people capable of implementing the new tax structure. It should be kept in mind that the new tax policy is not a financial issue only. It is linked to all the departments of an organization. When a company itself gets a good or service, it shall pay VAT for it. So, in order to demand the refunds, it should have all documents dealing with the VAT payment.