All About VAT Category Code in KSA Invoicing

Value Added Tax (VAT) was instituted by the Kingdom of Saudi Arabia (KSA) on January 1, 2018. The taxing body decided to apply a single VAT rate to all sales of goods and services. The Zakat, Tax and Customs Authority (ZATCA) raised the regular VAT rate from 5% to 15% effective July 1, 2020, to counteract COVID-19.

According to KSA VAT invoicing regulations, taxpayers must provide a tax invoice, simplified tax invoice, or summary tax invoice, depending on the circumstances. This page provides comprehensive information on the VAT category code under KSA VAT.

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ZACTA announced Saudi Arabia's e-invoicing's ninth wave under phase 2 on November 17, 2023. Therefore, wave 9 of phase 2 applies to companies registered under KSA VAT that have more than SAR 30 million in revenue in 2021 or 2022. As a result, beginning on June 1, 2024, they must link their ERP, accounting system, and point of sale system with ZATCA's Fatoora site.

VAT category number that must appear on the invoice

The VAT category codes that should be included on an invoice depending on the kind of products or services—standard rate, zero-rated, exempt, etc.—were announced by ZATCA.

The list of VAT category codes to be used in KSA while making invoices is provided in the table below:

Category of goods/services	VAT category code to be mentioned
Standard rate	S
Zero-rated goods	Z
Exempt from tax	E
Services outside the scope of VAT or Supplies not subject to VAT	O

Standard rate supplies

Standard rate supplies are those that are taxable and subject to a 15% VAT charge. The majority of supplies fall under this category; the exceptions include zero-rated, exempt, and out-of-scope supplies.

Zero-rated supplies

Although the rate is 0%, zero-rated supplies are subject to taxes. The authorities may impose the VAT rate in the future. These include investing in metals, exporting goods and services, and international transportation.

Exempt supplies

There is no VAT due on these supplies since they are exempt. In the future, ZATCA might declare them to be taxable supplies. Notified financial services and qualified residential estate are two examples of this.

Out-of-the-scope supplies

These are the goods that are excluded from the VAT's jurisdiction. Among them are:

gifts offered as a means of advertising a business
provided products or services instead of damages
payment of salaries and earnings per the employment contract

Code for VAT category exemption in sales

ZATCA has also made it mandatory to give the reason exemption code and the VAT category code. The types of goods and services that are exempt as well as the codes that must be included when creating VAT invoices in Saudi Arabia are included in the following table.

Description of exempted/zero-rated goods/services	VAT category code to be mentioned	VAT exempt reason code to be mentioned
Financial services mentioned in Article 29 of the VAT Regulations	E	VATEX-SA-29
Life insurance services mentioned in Article 29 of the VAT Regulations	E	VATEX-SA-29-7
Real estate transactions mentioned in Article 30 of the VAT Regulations	E	VATEX-SA-30
Export of goods	Z	VATEX-SA-32
Export of services	Z	VATEX-SA-33
The international transport of goods	Z	VATEX-SA-34-1
International transport of passengers	Z	VATEX-SA-34-2
services directly connected and incidental to a Supply of international passenger transport	Z	VATEX-SA-34-3
Supply of a qualifying means of transport	Z	VATEX-SA-34-4
Any services relating to Goods or passenger transportation, as defined in article twenty-five of these Regulations	Z	VATEX-SA-34-5
Medicines and medical equipment	Z	VATEX-SA-35
Qualifying metals	Z	VATEX-SA-36
Private education for citizen	Z	VATEX-SA-EDU
Private healthcare for citizen	Z	VATEX-SA-HEA

The implementation timeline and the two phases of the Saudi Arabian e-invoicing regulations

Phase 1: E-invoice issuance and storage

A taxpayer in Saudi Arabia is required, as of December 4, 2021, to issue and retain electronic notes and invoices instead of physical credit and debit notes.

As a result, a taxpayer in the Kingdom of Saudi Arabia had to begin utilizing an electronic invoicing system that complies with ZATCA and has internet access. An online cash register, computer software, or a cloud-based e-invoicing solution can all be used as the e-invoicing system.

When sending an e-invoice, make sure to include all required fields and elements of the tax invoice. These fields encompass the seller's name and VAT registration number, the time of issuance, the total VAT amount, and the invoice's total value including VAT.

Phase Two: ZATCA System Integration

This phase was implemented in stages for the targeted taxpayer categories starting on January 1, 2023. Now, to send the created e-invoices to the portal for validation and verification, you must interface your e-invoicing solution with ZATCA's system.

There are additional technical requirements for this phase, thus it is better to have a system that complies with ZATCA criteria by design. A cryptographic stamp, a digital signature, a sequential number that distinguishes each e-invoice, and a universally unique identifier (UUID) must all be generated by your system and able to communicate with external systems via Application Programming Interfaces (APIs).

The "first wave" of Phase 2 applies to companies making more than SAR 3 billion (USD 800 million). All VAT-registered taxpayers with revenues over SAR 500 million (USD 133 million) in 2021 are included in the project's second phase. By July 1, 2023, these taxpayers must incorporate their e-invoicing system into the Fatoora portal.

REQUIREMENTS FOR E-INVOICING

The following are the two kinds of invoices that your company can issue:

The standard invoice, or electronic invoice

For the majority of B2B and B2G transactions, an electronic invoice is generated. Customers use this kind of document to claim their input VAT deduction. Companies send standard electronic invoices to customers in a predetermined format. After cryptographic stamping and clearing the standard e-invoice, ZATCA issues it to the buyers. Integration with the ZATCA site becomes applicable after deploying the integration phase, starting from January 2023.

The electronic invoicing solution generates fields mandated by VAT legislation for standard electronic invoices. These fields encompass information about the seller and buyer, transaction details, product/service specifics, and other technical fields. According to VAT legislation, standard electronic invoices have fields for the seller and the buyer, transactions, product/service details, and additional technical fields that the electronic invoicing solution should generate.

Simplified e-invoice

For the majority of instantaneous B2C transactions, simplified electronic invoices are made so the buyer doesn't need to utilize the invoice to deduct input VAT.

If covered by the e-invoicing regulation, businesses simply communicate the streamlined invoices with consumers during generation. No additional action is necessary afterward. Simplified e-invoices must be notified to the authority within 24 hours of issue during the integration phase.

A standard electronic note issuer issues a standard e-invoice, while a simplified electronic note issuer issues a simple e-invoice. These credit/debit note kinds correspond to the sorts of invoices for which they are issued.

Your consumers only need to get the streamlined e-invoices during the first phase. In phase 2, these bills, however, will need to be reported to ZATCA 24 hours after they are issued.

The Bottom Line

For organizations, e-invoicing has several advantages: it may boost productivity, expedite payment processing, lower expenses, improve accuracy, raise security and compliance, improve customer relations, provide visibility and reporting, and be more environmentally friendly. Businesses can improve cash flow management, lower administrative expenses, increase customer satisfaction, and streamline their invoicing procedures by implementing e-invoicing in accounting software. With the invoicing industry going digital, e-invoicing is a wise decision for companies looking to streamline their financial processes and maintain their competitiveness in the market.

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