What is VAT Exempt?
A VAT exempt supply is a supply of goods or services that does not bear VAT and on which the supplier cannot recover any related input tax. It differs from zero-rated supplies, which are taxable at 0% and allow input tax recovery.
How It Works
- Identify whether the supply falls under an exempt category in the VAT Implementing Regulations.
- Issue a regular invoice without VAT and without a VAT registration number where applicable.
- Track input VAT on purchases related to exempt supplies and disallow recovery.
- Apply partial-exemption apportionment if the business makes both taxable and exempt supplies.
- Report exempt supplies in the relevant box of the periodic VAT return.
Saudi Context
Major Saudi exempt categories include financial services with explicit margins, certain real estate rentals, and life insurance. A business making mostly exempt supplies often becomes a net cost centre for VAT because input tax becomes part of the cost base.
Example
A residential property owner rents an apartment for SAR 5,000/month. The rent is VAT-exempt, so no VAT is charged. The owner cannot reclaim VAT paid on related maintenance.