The importance of Value Added Tax (VAT) and its impact on the economy and businesses.

Value Added Tax (VAT) is one of the most important financial tools that governments rely on to provide sustainable financial resources that support public spending and improve the services offered to citizens. It is not just a source of revenue; it also plays a key role in regulating the economy and encouraging commercial activities to operate formally, which enhances market stability and reduces tax evasion.

Value Added Tax (VAT)

VAT is an indirect tax imposed on goods and services sold within the Kingdom, and its rate has been 15% since its implementation under modern Saudi regulations.

The tax is applied at all stages of production and distribution, from suppliers and manufacturers until the product or service reaches the final consumer.

This tax is also considered a main source of income for the state, as it strengthens the national budget and significantly contributes to financing national projects and providing public services to citizens.

The Importance of Value Added Tax

VAT holds great significance in the national economy as it contributes to:

• Providing a stable source of revenue for the state: which supports public projects and improves the level of national income.
• Enhancing economic growth: by encouraging local production and market competition.
• Regulating economic activities: making all commercial operations more formal and documented.
• Promoting tax fairness: by distributing the tax burden among end consumers based on their consumption.
• Reducing tax evasion: due to official compliance with invoices and accurate accounting records.
• Financing national projects: by providing continuous financial resources that support development plans.

How VAT Works

The application of VAT in the Kingdom can be explained through the following stages:

Tax Imposition

The final consumer bears the tax cost when purchasing the product, even though the tax is applied at all stages of production, sale, and distribution, ensuring continuous revenue collection from the market.

Tax Collection

Businesses act as intermediaries between the final consumer and the Zakat, Tax, and Customs Authority. They collect the tax from consumers and remit it to the Authority without incurring additional costs.

Tax Payment

The merchant pays VAT when purchasing goods eligible for input tax deduction, and then deducts what they paid when selling the product to the final consumer, ensuring a smooth process and reducing the merchant’s financial burden.

Tax Refund

Suppliers keep accurate tax records and invoices to prove their right to input tax deduction and allow them to reclaim the tax they paid within a specified period.

Compliance with Tax Payment

All supply chain parties are encouraged to comply with tax payments. Manufacturers and suppliers only bear the tax temporarily before supplying the product, reducing the likelihood of tax evasion.

Taxable and Exempt Products

First: Taxable Goods and Services (15%)

These include:

• Various food items
• Local transportation services
• Private education and educational services
• Commercial property rental
• Petroleum derivatives and local gas
• Private healthcare services
• Telecommunications, internet, and digital services
• Gold, silver, and platinum for investment with purity below 99%
• Health insurance and other types of insurance
• Brokerage and commission-related fees
• Consulting and administrative services related to supply

Second: Exempt Goods and Services

These include:

• Protection, savings, and reinsurance premiums
• Life insurance and related reinsurance
• Operating bank accounts, deposit accounts, and savings accounts
• Issuing or transferring debt securities and financial instruments
• Financing and lending-related fees and interest
• Qualified medicines and medical products
• Exports outside GCC countries
• International transport and residential property rental

Third: Non-Taxable Products

• Public education
• Public healthcare services
• Property insurance outside the Kingdom

VAT Refund Period

Saudi Arabia allows taxpayers to request VAT refunds within a specific timeframe to ensure suppliers’ rights and reduce their financial burdens:

• Deadline for submission: Taxpayers must submit a refund request within six months from the end of the tax period related to the transaction; otherwise, the right to a refund is lost.
• Required documents: Taxpayers must keep accurate invoices and tax records proving the amounts paid, as they are essential for claiming refunds.
• Refund process: After submitting the request, the Zakat, Tax, and Customs Authority reviews the documents and, once approved, transfers the eligible amounts to taxpayers.
• Importance of meeting deadlines: Compliance preserves rights, prevents rejection, and supports organized financial operations with reduced tax-related risks.

How Wazen System Helps You Manage VAT

Wazen plays a vital role in simplifying VAT management for institutions and companies by streamlining processes and accurately monitoring accounts:

• Automatic tax calculation: The system automatically calculates VAT on all sales and purchases, reducing errors and ensuring accuracy.
• Tax reporting: Wazen provides detailed reports on payable and refundable taxes in compliance with the Zakat, Tax, and Customs Authority.
• Facilitating tax refunds: It tracks invoices and tax records needed for refunds within the required timeframe.
• Managing invoices and documents: Wazen stores all tax documents and invoices in an organized manner for easy review during audits or refund requests.
• Reducing financial and tax risks: The system minimizes violations and fines through automated compliance with tax laws.
• Integration with accounting operations: It connects sales, purchases, and inventory, ensuring a smooth and comprehensive tax calculation process.

Conclusion

You can benefit from Wazen’s free 14-day trial, approved for the second phase of e-invoicing, without any commitments. It allows you to practically experience VAT calculation and report preparation accurately and easily, in line with the requirements of the Zakat, Tax, and Customs Authority.

Frequently Asked Questions About VAT

What are the types of taxes in Saudi Arabia?They include VAT, withholding tax, excise tax, and Zakat fees.

What is the difference between income tax and VAT?

• Income tax is imposed on the profits of individuals or companies.
• VAT is imposed on goods and services upon sale or purchase at a rate of 15%.

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