What is value added tax?
Published
Value added tax is an indirect tax on the consumption of goods and services, collected in stages along the supply chain so that each business pays tax only on its value added, with the final burden falling on the end consumer. A registered business is not the taxpayer - it is the collector, on the authority's behalf.
The core equation
What a business remits = Output VAT − Input VAT = 15% × (its sales − its taxable purchases) = 15% × its value added
The full chain in numbers
A supplier sells goods to Al-Waha; Al-Waha sells them to an end consumer:
| Stage | Sale (net) | Output VAT | Input VAT | Remitted to ZATCA |
|---|---|---|---|---|
| Supplier → Al-Waha | 100,000 | 15,000 | 0 | 15,000 |
| Al-Waha → consumer | 150,000 | 22,500 | 15,000 | 7,500 |
| Total | 22,500 |
Read the table from three angles:
- The state collected SAR 22,500 = 15% of the final price (150,000), split across two stages.
- Al-Waha remitted 7,500 = 15% of its value added (150,000 − 100,000 = 50,000). Nothing came out of its profit: it collected 22,500 from the consumer and deducted the 15,000 it paid the supplier.
- The end consumer paid the whole 22,500 - the only party in the chain who can deduct nothing.
That is the literal meaning of the tax's name: each stage remits on the value it added.
Registration thresholds
| Annual taxable supplies | Rule |
|---|---|
| Above SAR 375,000 | Registration mandatory |
| SAR 187,500 to 375,000 | Registration voluntary |
| Below SAR 187,500 | Registration not ordinarily available |
Why register voluntarily? To recover your input VAT. A startup buying significant equipment before it sells, or a supplier whose customers are registered businesses that prefer dealing with registered vendors - voluntary registration turns the tax on its purchases from a cost into a credit.
A registered business's obligations, briefly
- Charge 15% on taxable supplies and issue valid tax invoices.
- Keep output and input VAT in separate accounts.
- File the return on time and pay the net.
- Comply with e-invoicing in both phases.
- Retain records and invoices for the statutory periods.
Frequently asked questions
Is VAT a cost to my business?
Done properly, no - you are a collection intermediary, and what you pay on purchases you deduct. It becomes a cost only when the right to deduct is lost: a defective invoice, purchases tied to exempt supplies, or recording errors.
How does it differ from a sales tax?
A sales tax is collected once, at the final sale. VAT is collected at every stage with a deduction for the previous one, reaching the same total by a route that is self-policing: your deduction requires your supplier's invoice.
I'm below the threshold - can I add VAT to my invoices?
Absolutely not. Charging tax without registration is a serious violation - and an alert customer checks your VAT number before paying it to you.