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Goods and Services that come under VAT can be classified into three categories:
- Taxable Supplies – Those goods and service which are subjected to tax
- Exempt Supplies – Those goods and service which are not subjected to tax.
- Nil-rated supplies – Those goods and service which are subjected to 0% tax.
Significance of Taxable supplies:
All those goods and services bought or sold in, or imported into the Kingdom are eligible for VAT unless specifically exempted.
Significance of Exempt supplies:
All those goods and services that are specified as Exempt goods and services are not subjected to tax under VAT. A seller making exempt supplies does not collect VAT on the sales made by him and will not be allowed to deduct the input VAT he pays to suppliers. Therefore, businesses that sell exempt supplies alone are not allowed to register for VAT even though their taxable sales might be above the threshold limit of SAR 375,000.
Exempt goods and services under VAT include the following:
- Specific financial services: Except where the consideration payable is by way of a discrete amount, any supply of financial services will be exempt.
- Real estate (Residential): Any supply of property zoned as residential real estate or designed or used for residential purposes by way of lease, license or rental will qualify to be treated as exempt for the purposes of VAT.
However, any supply of hotel accommodation, non-hotel but serviced accommodation, or residential property held out for rent in a similar manner to hotel or serviced accommodation will not qualify for exemption. Similarly, any commercial property zoned or designated or used for commercial purposes will not qualify for such exemption under VAT.
Significance of Nil-rated supplies:
Nil-rated supplies or Zero-rated goods and services as they are called, are legally taxable but they are taxed at the rate of 0%. The significance of this is that businesses selling zero-rated supplies can still deduct their input VAT and receive refunds. This is the major point of difference between Nil-rated and exempted supplies as sellers who sell exempted supplies cannot claim refunds.
These Nil-rated goods and services include:
- Non-GCC exports: The goods exported by taxable businesses to a destination outside the GCC or services provided to non-GCC residents, are nil-rated supplies. No VAT is levied on the same.
- International transport: Zero-rated goods and services under international transport include transport of passengers and goods internationally; vehicles and equipment that will be used for international transportation and services that are provided in connection with international transportation.
- Medicines and medical goods: As per the classification issued by the Ministry of Health (MoH) or any other competent authority from time to time, Qualifying Medicines and medical goods will be part of MoH’s formula drug list and will be treated for the purpose of VAT as zero-rated goods and services. Hence drugs not on MoH formula list will not be considered as Qualifying Medicines and medical goods and will be taxed at the standard 5% VAT rate.
- Investment metals: Gold, silver, and platinum of 99% purity or more are known as qualifying investment metals. There are two kinds of transactions involving such metals which are treated as zero-rated supplies.
- Where a producer or refiner sells an investment metal
- Further sale of these metals where the purity level remains the same.
- Paying VAT on imports: Imports in KSA are always taxable under VAT unless the product is specifically exempted for the purpose. Irrespective of whether the dealer is registered for VAT or not, those businesses which import in KSA are required to pay VAT on imports.