Value Added Tax (VAT) is an indirect tax introduced in the Kingdom of Saudi Arabia in 2018. This tax is levied at multiple stages of the supply chain and applies to the importation and supply of goods. This means that when a manufacturer purchases raw materials for their business, they must pay VAT. Similarly, when a consumer purchases the end product, they must also pay VAT.
There are two categories of VAT to remember: output VAT and input VAT. The former refers to the VAT that a taxable person collects on a sale, while the latter refers to the VAT that a business pays its suppliers. It is important for you to understand the basics of KSA VAT law to smoothly implement e-invoicing in Saudi Arabia.
Accordingly, this article will cover everything you need to know about input VAT and input VAT deductions.
What are the different types of Input VAT?
The term input VAT is an umbrella term that can describe the following subtypes:
1.Input VAT on self-account goods and services
If you happen to purchase goods or services from a non-KSA resident, you must pay self-assessed VAT. Such purchases are a part of the reverse-charge mechanism, wherein you must pay the VAT on purchasing the supplies.
The following conditions make you eligible for input VAT:
- If you use the purchase for carrying out economic activities, and
- If you received the services or goods within the Kingdom of Saudi Arabia
Note that you must report this reverse charged VAT in the field 9 of the VAT return form.
2.Input VAT on taxable supplies
The input VAT deduction applies to all taxable supplies, including zero-rated supplies. In other words, let’s say you have already paid VAT when buying any taxable services or goods. You can use this to claim a deduction when paying the output VAT on the sale of goods or services.
3.Input VAT on imports outside the Gulf Cooperation Council (GCC) states
If you import supplies or goods from GCC states, you have to pay the input VAT application on the same. The Input VAT KSA guidelines state that you can get tax credits for zero-rated and standard-rated supplies. VAT for exempted goods is not allowed as an input VAT deduction.
What does Input VAT Deduction Mean?
The term Input VAT deduction refers to deducting the total value of input VAT from Output VAT. A higher Input VAT means you may have to pay a lower VAT when paying your taxes and vice versa.
You can claim input VAT only when your supplier issues an e-invoice using the ZATCA-compliant e-invoicing software.
Who is eligible for Input VAT Deductoiin?
In order to claim input VAT, it is essential for you to use the incoming supplies to perform economic activities. Let’s say you purchase 100 uPVC frames. You must use all 100 of them in your business inventory (in other words, all 100 should be for sale to customers) to be able to claim input VAT deductions on them.
The following table represents different instances where business owners are eligible for input VAT:
|Economic Activities Related Scenarios in Saudi Arabia||Input VAT related to economic activities in Saudi Arabia||Input VAT related to non-economic activities in Saudi Arabia||Input VAT related partially to economic and non-economic activities in Saudi Arabia|
Input VAT used to make taxable supply
|Fully deductible||Not deductible||The proportionate deduction that relates to economic activities|
Input VAT used to make exempted supply
|Not deductible||Not deductible||Not deductible|
All other input VAT and overheads that cannot be separately allocated
|The proportionate deduction that relates to taxable supplies||Not deductible||The proportionate deduction that relates to economic activities and taxable supplies|
What are the restrictions on Input VAT Deduction?
The Zakat, Tax and Customs Authority (ZATCA) has provided detailed guidelines on the types of services and goods that are ineligible for Input VAT deduction. These are
- Any Goods/services that have been used for private purposes
- Supplying sporting, entertainment, or cultural services.
- Offering catering services to eateries, hotels and restaurants.
- Purchasing or leasing restricted motor vehicles. (there is an exception here. You can get input VAT deduction if the vehicle is used for the following
- Economic activities)
- Modifying, maintaining, or repairing restricted motor vehicles
- Paying for fuel consumption related to restricted motor vehicles
- Supply any prohibited goods by KSA Law
- Paying expenses related to general overheads and other non-attributable costs
When should you claim VAT?
The right time to claim input VAT deductions can vary based on your accounting methods.
Accrual-based accounting is a type of accounting system where the income and expenditure are noted when they accrue. If you follow such a method, then you should claim the input VAT deduction during the tax period of the supply (purchase of goods/services).
Cash-based accounting is a type of accounting system wherein the income and expenditure are recorded at the same moment as the cash payment or receipt is made. If you follow this system, then you can claim the input VAT deduction in the same tax period when the cash is paid for buying services or goods
If there happens to be any remaining input VAT deduction, it is then carried forward to the next tax period. The amount is adjusted against the tax payable in the following tax period. It is important to note that if there is any input VAT deduction balance left, you can go ahead and claim it as a refund. It is vital to remember that you can claim the tax credit up to five years from the year the taxable supply was made.
Businesses are suggested to use e-invoicing software to rise the invoices and keep track of the e-invoices issued.
Let’s understand this with the help of an example.
Zayed Mohamed Apparel buys 10 women’s jeans from Jabar Clothes. Zayed Mohamed Apparel receives the invoice for this on 15th May 2022 and makes the payment on 10th June 2022. If Zayed Mohamed Apparel followed the cash accounting method, the company would record it in its books on the date of the payment, which is 10th June 2022. They will then claim the input tax deduction in June 2022.
Suppose they follow the accrual accounting method, then they can write the transactions in their books in May and make the claim for the tax period of May 2022.
1.What documents are needed for the Input VAT deduction?
To claim your input VAT deductions, you need the following documents:
- Customs document (this proves that the goods and supplies were procured in a manner that complies with custom law)
- VAT Tax Invoice2.
- 2.What goods are not eligible for Input VAT Deduction?
The sales of any goods that are prohibited for sale under KSA law are not applicable to Input VAT deductions.
3.Are tax invoices in non-Arabic languages eligible for an input VAT deduction?
Yes, they are. However, you must provide evidence of the payment of VAT (such as a bank transfer statement or a receipt procured from the supplier). ZATCA may also ask you for a translated version of the invoice.