The current rate of VAT in Saudi Arabia is 5%. This rate will increase to 15% from 1st July 2020. The increase in this rate has been done in the backdrop of a decrease in customer spending, a decline in the revenues from oil and gas, and an increase in the cost of providing healthcare in the pandemic. There is an expectation that this increase will result in greater consumer spending owing to a future increase in the VAT rate. Consumers will be driven by the fact that it is better to do the spending before the Vat increase takes its effect. There is an estimation of a rise in spending in the automobile, real estate and the retail sectors. It is expected that the increase will happen before 1st July from which date the rate of VAT is going to increase. The sectors that supply directly to the consumer would like to remain competitive in the changed scenario when an increase in VAT is in the offing. To remain competitive, they will be compelled to absorb a certain amount of cost increase due to the increase in the VAT rate to attract their customers to buy from them.
Certain issues need to be considered:
- Rental agreements, cleaning contracts or subscription services that are going to touch the date of the increase in VAT.
- The time of supply also is an important item of consideration in terms of continuous supply or with breaks.
- Advanced payments received from customers before the rate increase also is an important issue to deliberate on. Especially when there is a phenomenon of the return of goods after the increase in VAT. Annual pricelist needs to be adjusted in the new situation.
- Pricing is an important area to be considered with the objective of absorbing the VAT increase to bring relief to the consumers. There will be renewed thoughts on rebates and discounts offered by the businesses. This time the increase in VAT rate has to be factored in.
If you’re to purchase immovable property, the increase in the rate has to be kept in mind. There will be a change in tax invoices, debit notes and credit notes. There will be a change in the use of capital assets. The calculation of VAT apportionment for those businesses that have to deal with both taxable and tax-exempt supplies needs to be treated accordingly. The finance and real estate sector will be adversely affected because they cannot claim VAT input incurred related to exemptions. This will lead to change in the profitability of these sectors and that would ultimately affect the consumers.
There are certain sectors such as government bodies, hospitals, public schools, etc. that cannot claim any VAT on their expenses. They will be a disadvantaged section of the economy. The foreign investors will also be disadvantaged for they will need to file claims for refund whose deadline is 30 June for the VAT incurred in the previous year.
The impact on the Gulf Cooperation Council agreement and the future of VAT is also unknown. The new increase in VAT rate needs to be agreed upon by the member countries. The increase in rate must be announced at least six months before the date of the increase.
About GCC Filings
GCC Filings is an accountancy firm that provides professional services to the business community for filing VAT and other returns related to taxes. It also helps the clients in the event of an imposition of a fine, review petition, communicating with the FTA, etc.