Calculation of tax payable on taxable supplies

Taxes are one of the financial instruments used by countries to generate revenues that enable them to finance public projects and basic services. Among the types of taxes applied by many countries, VAT stands  out as one of the indirect taxes imposed on supplies subject to it. This article aims to explain how to calculate the tax payable on taxable supplies in a simplified way for non-professionals and business owners.

The concept of taxable supplies
 The term taxable supplies refers to all goods and services that are sold or offered for a specified price, which are subject to VAT according to the rate determined by the tax system in the country. Supplies are divided into:

1.  Basic Rate Taxable Supplies: Goods and services that are taxed at a certain rate, such as 5% or 15%, according to local laws.

2.  Zero-rate taxable supplies: Includes some goods and services that are taxable, but at 0%, such as certain exports and financial services.

3.  Tax-exempt supplies: Goods and services that are not taxed at all, such as some medical and educational services.

How to calculate the tax payable
To calculate the tax payable on taxable supplies, you must follow these steps:

1. Determination of the value of taxable supplies
 The total value of sales or services provided to which VAT applies is first determined. For example, if you have a business that sells products worth SAR 100,000 and the base tax is 15%, the tax is calculated as follows:

Tax due = Value of supplies × tax rate,
i.e.:
 tax due = 100,000 × 15% = 15,000 riyals

2. Calculation of refundable tax
If a business buys taxable goods or services, it pays VAT on those purchases. This tax can be deducted from the tax payable. For example, if the business purchases SAR 50,000 worth of goods and pays SAR 7,500 (15%) tax, this tax can be recovered.

3. Calculation of net tax due The
tax payable is calculated by the difference between the tax collected from customers (on sales) and the tax paid on purchases, according to the following formula:

Net Tax Due = Tax Collected - Refundable Tax

In the previous example:
 Net tax due = 15,000 - 7,500 = 7,500 riyals

Tax Return and Payment Mechanism

Business owners are obliged to submit  the tax return to the competent tax authorities according to the specified time cycles (monthly or quarterly). The tax return includes:

  1. 1.  Total taxable sales.
  1. 2.  Total tax collected.
  1. 3.  Total refundable tax.
  1. 4.  Net tax due.

Companies must pay the amount due within the specified period to avoid penalties.

The importance of tax compliance
Tax compliance is an essential part of corporate financial management, and has several benefits, including:

  1. 1.  Avoid fines and legal penalties.
  1. 2.  Enhance transparency and credibility with government agencies.
  1. 3.  Improving the financial situation through proper tax planning.
  1. 4.  Enhance the financial stability of the business activity.

Calculating the tax payable on taxable supplies is essential for business owners to ensure compliance with tax regulations and avoid legal issues. By understanding how to calculate tax and file a tax return correctly, businesses can effectively manage their tax liabilities and make the most of tax deductions and refunds. Therefore, it is advisable to use tax experts or accounting software to ensure accurate calculations and compliance with laws.