IMPACT OF KSA VAT HIKE
Saudi Arabia to increase VAT to 15% W.E.F 1 July, 2020
In response to the unprecedented impact on economy due to COVID-19 pandemic, the Ministry of Finance, Saudi Arabia has decided to increase the standard rate of VAT from 5% to 15% with effect from 1 July ,2020.
This measure is intended to address the fiscal imbalance due to loss of oil and tax revenue, decrease in market spending and the cost incurred to fight the pandemic. With the limited details available now, we can have a primary assessment of the impact of this hike.
- Impact on business
- Impact on Consumers
- Impact within GCC
- Transitional Provisions
- How T&H can serve you?
Impact on Business
The greater impact on businesses will be on the prices. It will be tough to keep competitive after increased rates. Many will have to subsume a part of the increased tax rate into their margin, which will be tough. At the same time, many expenses will be increased for the businesses and they will be forced to increase price to cover the same.
Businesses in financial services, real estate services, Government bodies, public educational institutions etc which are under exempt category will face an increase in their expenses as they are not allowed to claim input.
Main concerns that will require thorough consideration and intervention by taxpayers include: –
- Cash flow management as more amount of tax will be paid even if not collected.
- Accurate tax computation and filing. Increased rate implies increased penalty.
- Changes to accounting system, POS and digital platforms.
- Changes to invoices and other tax documents.
- VAT clauses in existing contracts, agreements etc.
- Goods returned after rate increase.
- Advance payments received before increase date.
- Purchase of assets and property.
- Rebates and Discounts.
Impact on Consumers
Clearly, the higher cost of living would have a significant effect on end customers. Prices will increase after the date of the increase in the rate of VAT. This means two things; customers will be on the buying line before the vat rate increase in order to save the tax and there will be a drop in purchases after the vat increase.
Impact within GCC
The tax experts opine that UAE and Bahrain may not be going to follow the path of Saudi in increasing VAT rates. However, as per GCC VAT agreement, any increase in VAT rate should be agreed amongst member states and announced at least 6 months before implementation.
Another matter of concern is the difference in rates for same products in different member states. It can affect the buying habits.
GUIDELINES ISSUED ON TRANSITIONAL PROVISIONS
As an explanation to the VAT rate increase, The General Authority Of Zakat And Tax (GAZT) issued a guidance on the transitional steps that need to be considered during the transition period. The period is from 11th May 2020 to 30th June 2021.
The guidance note issued for the transition period for the VAT rate increase is 11th May 2020 to 30th June 2021, specifically for the Government contracts and the agreement between two VAT registered persons before and after 11th May 2020 and the treatment of VAT for the supplies made after 1st July 2020 where VAT invoices have been issued prior to this date. The below table shows the treatment of VAT for Government contracts and other signed agreements as per the guidance issued by the GAZT.
VAT treatment for the government contracts are as shown below for the period before and after 11th May 2020.
Additionally, it is mandatory to issue a vat invoice for the supplies 5% which subject to VAT at 15%, and for the additional vat due should be invoiced after the said period.
Other contracts by VAT Registered Persons
VAT treatment for contracts by VAT registered parties are as shown below for the period before and after 11th May 2020.
It is mandatory to issue invoice, additionally the customer has the full right to deduct full input tax, if customer cannot claim full input tax under such contacts entered before 11th May 2020 and supplies made after 1st July 2020 then vat would be at 15%.
Any VAT invoices issued prior to 1 July 2020
If any VAT invoice already issued before the 1st July 2020 the vat treatment would be as shown below –
The guide issued by GAZT confirms that any a person enters into a contract before 11th May 2020, for which as per the agreed terms, the supplier raises invoices on a monthly basis, then such supplies made on or after 1st July 2020 would be subject to 15% VAT.
Also the guide further explains that any supplies invoiced prior to 11th May 2020, with supplies that will extend a period more than 30th June 2021, such supplies made until 30th June 2021 would be subject to 5% VAT and the supplies made after the date would be subject to 15% VAT.
Additionally, as per the guidelines issued by GAZT it is understood that If any person has issued invoice at 5% for a supply that would be subject to 15% VAT, taxpayer should issue an additional invoice for the same supply for the VAT difference due.
How T&H can serve you?
T&H can help you to understand the exact impact rate change can bring about in your business and support you in the transitional provisions and more over professionally handle all your VAT related requirements from registration, computation, filing and departmental compliances.
Disclaimer: The data and information provided above are derived from various market sources, press releases and expert opinions and does not construe to be of consultancy advise.