The Saudi Arabian Government recently announced that the VAT or Value Added Tax will be increased from 5% to 15% as of July 1st, 2020. The increase is one of several measures that have been taken in response to steadily declining government revenues associated with the impact of the Coronavirus on the Saudi Arabian economy. Reports state that the decline in revenues is attributed to increased healthcare costs, lower oil prices, and reduced economic activity.
How will the VAT increase affect Businesses?
Due to the enhancement of VAT rate, most of the businesses in all industries will be affected in Kingdom of Saudi Arabia (KSA). Additionally, business can expect a higher amount of scrutiny from the General Authority of Zakat and Tax (GAZT) because the VAT has become an important component of the revenue to the state. It is time for businesses to review their costs as even those businesses that are exempt shall be affected.
Whether your sales are fully or partially exempt, you could experience increased costs directly associated with the 10% VAT increase. Furthermore, the increase will have an impact on all Saudi Arabian industry sectors including the financial, insurance, and real estate sectors. Although consumers will feel the impact of the VAT increase as well, it remains unknown as to whether or not the lower VAT rate will still apply to foods and utilities in order to mitigate the effects of the increase.
Due to the difference in timing between VAT payments and recovery, businesses can expect the increased tax to impact their cash flow. Consequently, cash flow planning efforts will have a renewed significance. Additionally, business owners should review their internal operating processes and systems so as to reflect the higher rate. In the coming weeks, businesses and consumers can expect to see additional guidance for transitional rules released by the authorities.
The rate increase has affected cash flow of businesses as there has been a difference in the timing of VAT recovery and payments. Thus, the importance of cash flow planning has emerged as a significant aspect of keeping businesses afloat. It is time to take a deeper look at the processes and internal systems of businesses as there is an increased VAT rate.
Additional Considerations
Taxpayers should begin monitoring the impact of the VAT rate increase immediately so they can measure the effect on their cash flow, chain of supply, and daily operations. As a reminder to taxpayers, the window for making voluntary disclosures without fees or penalties will remain open until June 30th as per last month’s VAT incentive alerts. This will enable businesses to fully ensure that they are compliant with VAT regulations.
If your company needs assistance for business and corporate advisory consulting or tax advisory services, contact IMC Group.
