Business owners, merchants, and accountants in the Kingdom need to precisely understand the mechanism for calculating Value Added Tax (VAT), as any error in determining the base price, the tax amount, or the total invoice can affect the integrity of accounts, invoices, and tax returns.

The standard VAT rate in Saudi Arabia is 15%, effective since July 1, 2020. This rate applies to taxable supplies, while some supplies may be zero-rated or exempt according to statutory provisions.

The tax calculation mechanism depends on the type of amount you have; you may need to add a 15% rate to a price exclusive of tax, or extract the tax value and the original price from an amount that already includes it.

This guide reviews both calculation methods with practical examples and explains the role of VAT calculation software in reducing errors associated with invoices and the movement of sales and purchases.

If you wish to learn about the different aspects of the tax, from registration to filing returns and tax recovery, you can refer to the VAT guide in Saudi Arabia.

What is Value Added Tax (VAT)?

VAT is an indirect tax imposed on the buying and selling of goods and services provided by enterprises, subject to the exceptions and tax treatments prescribed for certain types of supplies.

The final consumer bears the tax burden, while registered enterprises collect output tax generated from their sales and handle the input tax paid on their purchases in accordance with applicable rules and regulations.

Accordingly, the tax is not classified as actual revenue for the enterprise; rather, the supply value must be recorded separately from the VAT in the accounts.

How to Calculate 15% VAT

When the specified price is exclusive of tax, VAT can be calculated using the following formula:

Tax Value = Price Before Tax × 15%

After determining the tax value, the final amount is calculated as follows:

Price Inclusive of Tax = Price Before Tax + Tax Value

The total can be reached directly using the following formula:

Price Inclusive of Tax = Price Before Tax × 1.15

These formulas are used when calculating the tax on supplies subject to the standard rate of 15%, in accordance with its calculation mechanism.

Example of VAT Calculation

Suppose the value of a service before tax is 1,000 SAR:

We start by calculating the tax amount:

1,000 × 15% = 150 SAR

Then we determine the total value after adding the tax:

1,000 + 150 = 1,150 SAR

The details of the transaction are as follows:

Thus, calculating the tax in this manner is straightforward when the base price is known prior to adding the tax.

How to Extract the Tax Value from the Total Amount

If the amount you have includes VAT, it is incorrect to multiply it by 15% to get the tax value, because this amount already includes the tax.

To separate the tax from the total, the following formula is used:

Tax Value = Amount Inclusive of Tax × 15 ÷ 115

The 15/115 formula is used to extract the tax from the total price that includes the standard 15% rate.

Example

If the total invoice value is 1,150 SAR inclusive of tax, the calculation is as follows:

1,150 × 15 ÷ 115 = 150 SAR

Accordingly, the tax value is 150 SAR.

To find the price before adding the tax, we subtract the tax amount from the total:

1,150 - 150 = 1,000 SAR

This method is useful when auditing invoices or reviewing prices displayed to consumers inclusive of VAT.

How to Calculate the Amount Before Tax

If you want to extract the amount before tax from a total that includes a 15% rate, you can use the following formula:

Amount Before Tax = Total Amount ÷ 1.15

The same result can be achieved using the alternative formula:

Amount Before Tax = Total Amount × 100 ÷ 115

The 100/115 formula is used to determine the base supply value when the total price inclusive of tax is known.

Example of an Amount of 2,300 SAR Inclusive of Tax

To extract the value of the amount before tax, we perform the following operation:

2,300 ÷ 1.15 = 2,000 SAR

Then we determine the tax amount by subtracting the base price from the total:

2,300 - 2,000 = 300 SAR

Thus, we obtain the following details:

Tax Calculation Method: Quick Table

The following table summarizes the most prominent formulas used in calculating VAT based on the value to be determined:

If the calculation results in fractions of a Riyal, the tax value stated in the tax invoice is rounded to the nearest Halala, in accordance with the applicable rules.

How are Sales and Purchases Taxes Calculated?

A VAT-registered enterprise typically deals with two types of tax: a tax arising from sales, and another incurred on purchases that meet the deduction conditions.

Output Tax

Output tax refers to the tax amount collected by the enterprise from its customers when selling taxable goods or providing taxable services.

Example:

If the value of taxable sales before VAT amounts to 20,000 SAR, the calculation is as follows:

Output Tax:

20,000 × 15% = 3,000 SAR

Input Tax

Input tax represents the VAT paid by the enterprise to suppliers when purchasing goods or services, and the right to deduct it depends on fulfilling the statutory conditions.

Example:

Suppose the value of purchases eligible for deduction before tax is 8,000 SAR.

The tax value is as follows:

8,000 × 15% = 1,200 SAR

In a simplified manner, output tax is compared to the deductible input tax when preparing the tax return, while adhering to relevant statutory provisions and exceptions.

You can learn how the tax relates to the movement of buying and selling by organizing procurement processes using a Procurement System.

Are All Goods and Services Subject to a 15% Tax?

No, not all goods and services are subject to the same rate.

The 15% rate is the standard VAT rate in Saudi Arabia; however, some supplies may be zero-rated or exempt, depending on the nature of the good or service and the governing statutory provisions.

Therefore, the 15% rate should not be automatically assigned to all products; rather, the correct tax treatment must be verified for each item or service.

This issue is important when configuring tax calculation software, as the accuracy of the results depends on the correctness of the tax rate recorded for each product or service.

How is the Tax Calculated When There is a Discount?

If the sale includes a discount that affects the taxable supply value, the tax should be calculated on the correct value after applying the discount, according to the specific tax treatment of the transaction.

Simplified Example:

Original Price = 1,000 SAR

Discount Value = 100 SAR

Remaining Price After Discount = 900 SAR

We calculate the tax on the value after the discount:

900 × 15% = 135 SAR

Then we add the tax to the discounted value:

900 + 135 = 1,035 SAR

Since the invoice details the supply value, discount, and due tax, it is important to organize this data when issuing invoices through a Point of Sale (POS) System.

Is There a Program to Calculate VAT?

Yes, VAT calculation software can be used instead of manually repeating calculations, especially for companies and stores dealing with a large volume of daily invoices.

The function of the software should not be limited to executing the following operation only:

Price × 15%

Rather, the tax should be linked to the following elements:

• Products and Services.
• Sales.
• Purchases.
• Discounts.
• Returns.
• Customers.
• Suppliers.
• Invoices.
• Accounts.
• Tax Reports.

DigitalPro allows determining the tax for each item, along with organizing invoices, returns, sales and purchase movements, and generating reports through a unified system.

You can learn about the Point of Sale System when searching for an accounting solution that helps calculate the tax and links it directly to invoices, accounts, and inventory.

What is the Benefit of VAT Calculation Software?

Using the software helps reduce errors resulting from repetitive manual calculations, especially in enterprises that deal with:

• Hundreds of invoices.
• A diverse assortment of products.
• Discounts.
• Returns.
• Branches.
• Points of Sale (POS).
• Daily movement of sales and purchases.

When creating an invoice, the system can determine the price before tax, the tax value, and the total, then post the transaction to sales records, the customer's account, and relevant reports.

This becomes increasingly important when dealing with electronic invoicing, as the enterprise must issue invoices containing the required data and tax values in an organized manner.

Common Errors When Calculating VAT

There is a set of recurring errors that should be noted when calculating VAT, including:

• Multiplying the total inclusive of tax by 15% to extract the tax amount.
• Failing to distinguish between the base price and the price inclusive of tax.
• Applying the 15% rate to supplies not subject to the standard rate.
• Overlooking discounts when determining the taxable value.
• Failing to verify returns and their impact on tax accounts.
• Recording an incorrect tax rate in the software.
• Including the tax amount within sales revenues.
• Continuing to perform calculations manually despite a high volume of transactions.

The basic calculation rule can be remembered as follows:

Price Before Tax → Multiplied by 15% to calculate the tax.

Price Inclusive of Tax → The 15/115 formula is used to extract the tax.

Frequently Asked Questions on How to Calculate VAT

How do I calculate 15% VAT?

To calculate the tax, multiply the amount prior to it by 0.15. For example, with a price of 1,000 SAR, the tax is 150 SAR, and the total becomes 1,150 SAR.

How do I calculate the amount inclusive of tax?

You can determine the total amount using the following formula:

Amount Before Tax × 1.15

Example: 2,000 × 1.15 = 2,300 SAR.

How is the tax value extracted from the total amount?

Use the following formula to separate the tax from the total:

Total × 15 ÷ 115

This formula is used to extract the 15% VAT from an amount that includes the tax.

How is the amount before tax calculated?

To extract the base price from the total, use:

Amount Inclusive of Tax ÷ 1.15

For example, if the total reaches 1,150 SAR, the value of the amount before tax equals 1,000 SAR.

How much is the tax in an amount of 115 SAR?

If the amount of 115 SAR is inclusive of tax, the tax value is calculated as follows:

Tax Value = 115 × 15 ÷ 115 = 15 SAR

The amount before tax equals 100 SAR.

How much is the tax on an amount of 100 SAR?

If the value of 100 SAR is before tax, the tax will be 15 SAR, and the total becomes 115 SAR.

However, if the value of 100 SAR is inclusive of tax, the tax is not calculated by multiplying the amount by 15%, but rather extracted using the 15/115 formula.

Is there an official VAT calculator?

Yes, the Zakat, Tax and Customs Authority (ZATCA) provides a Merchant and Consumer Calculator service to help users calculate VAT.

Conclusion

The method for calculating VAT is determined based on whether the available price includes the tax or represents the base value before adding it.

When the price is before tax, the following formulas are used:

Tax = Price × 15%

Total = Price × 1.15

However, if the price is inclusive of tax, the calculation can be performed using:

Tax Value = Total × 15 ÷ 115

Price Before Tax = Total ÷ 1.15

These formulas help calculate VAT in Saudi Arabia accurately when dealing with supplies subject to the standard rate, with the necessity of considering cases subject to different tax treatments.

With the expansion of sales and purchases, relying on VAT calculation software becomes a practical choice instead of manually repeating processes. You can learn about the Point of Sale System to understand the mechanism of linking tax to invoices, sales, purchases, inventory, and reports, then register and get a free trial to test a real tax cycle within the system.