In the context of the Saudi Arabian tax environment, the knowledge of credit notes, debit notes, and vouchers has become the necessary part of the VAT compliance. The Zakat, Tax, and Customs Authority (ZATCA) has a high level of VAT regime and as the process of e-invoicing with the help of ZATCA Phase II, business companies have to remain in contact with the digital and regulatory environment. Audit risks, penalties and late submission of vouchers could be due to errors or non-compliance in issuing credit or debit notes, or management of the vouchers.
The shift to Phase II of e-invoicing in Saudi Arabia is changing the approach of companies to their invoicing and modifications. All business entities engaging in taxable activities have now to draw structured electronic invoices and notes that meet the standards stipulated in the guidelines provided by the ZATCA. This guide will address the entire framework of credit notes, debit notes and vouchers under KSA VAT. You will know what they are, how they are issued, at what time, and why they are required in e-invoicing, and how such systems as SowaanERP can make compliance easier by automatizing and just integrating with the ZATCA Fatoora portal.
What is a Credit Note?
A credit note is a monetary document given out by a supplier in order to decrease the worth of an initial tax bill. It is normally applied when an invoice has been exaggerated or when the goods and services are returned or cancelled following the first purchase. The use of credit note in the KSA VAT allows to balance the taxable value and the VAT that will be paid in the past and the actual value of the transaction should be reflected in the supplier VAT book.
According to Saudi law of VAT, the circumstances whereby one has to issue a credit note can be characterized by over-charged supply value, customer returns, post-invoice discounts, or a change in the nature of supply which results in the reduction of the VAT liability. An example would be where a business wrongly invoices SAR 10,000 when it should have invoiced SAR 9,000, then the variance on the credit note should be rectified.
Credit notes are specifically identified in the VAT Implementing Regulations as obligatory tools of such adjustments. According to the advice given by ZATCA, such notes have to contain a reference to the initial invoice number, the date of issue, the new taxable value, and the amount of VAT under revision.
Take a basic case, a supplier sends an invoice amounting to SAR 10, 000 plus SAR 1,500 VAT, but the customer subsequently returns merchandise worth SAR 1,000. The supplier has to write a credit note with reference to the initial invoice that would reveal the decrease in taxable value and VAT by SAR 1,000 and SAR 150 respectively. The credit note will guarantee proper reporting in the filing of VAT return (KSA) and updates the digital record in accordance with the requirements of ZATCA e-invoicing Phase 2.
What is a Debit Note?
Debit note operates in reversal. It adds value to an original invoice and is normally applied in cases where the supplier under-charged a customer or offered extra goods or services after the original invoice was drafted. Basically, debit note balances out the credit note, whereby, upward adjustments get registered properly.
A debit note format has to be created in case of an increase in taxable supplies or an increase in taxable amount the result of a change in supply as required by KSA VAT framework. It is also applicable where the charges that have been left out are found out after issuing invoices.
As an illustration, a business generates a tax invoice amounting to SAR 8,000 inclusive of VAT, but the business realizes that it forgot to add an additional service of SAR 500. The supplier issues a credit note with reference to the first invoice where the taxable value goes up by SAR 500 and the tax value by SAR 75. This is an electronic note electronically transferred via e-invoicing system to the Fatoora platform of ZATCA and is either cleared or reported by the nature of the invoice.
The process makes it transparent and compliant so that the supplier can reflect the appropriate amount of VAT in their VAT return KSA, as well as, the buyer is provided with updated electronic note.
What does a Voucher mean in KSA VAT?
Another important tool that is identified under the Saudi VAT law is a voucher. It is described as any document or token that can allow the owner of the document to get goods or services, or a discount against a future supply. The VAT system treats vouchers differently since they are not always a supply of taxable nature. The sum of VAT payable will depend on the type of the voucher; face-value and benefit-based.
Face-value voucher is a certain monthly value like a SAR 100 gift cards. Under KSA VAT, VAT is not applied where such a voucher is issued since there cannot be a supply yet. The VAT is payable only after voucher has been redeemed and goods or services are provided.
As an example, when a customer redeems a SAR 100 voucher of prices of goods amounting to SAR 100 plus VAT, the supplier will impose SAR 15 VAT on the redemption, not at the time the voucher is issued. In the case of the customer purchasing products with an amount of SAR 150 and giving the rest SAR 50 in cash, the VAT is applied to the entire SAR 150.
In comparison, a benefit voucher (e.g. free meal voucher or a promotional offer) can have VAT imposed at the point of issue where this is an immediate supply. The therapy is based on whether the voucher offers a direct benefit or a discount.
According to the guidelines of ZATCA, business should have digital records of vouchers properly, they should have redemption tracking and must record the voucher transactions in their e-invoicing XML records. This makes the reconciliation of this in the audit and submission of VAT returns easy.
Obligations of regulatory and ZATCA
The Saudi VAT has laws and regulations applied to the handling of credit notes, debit notes and vouchers that are regulated under the VAT Law and the VAT Implementing Regulations provided by ZATCA. Besides, the E-Invoicing Regulation expands the set of regulations to the digital environment and demands that creating such documents in any form, the businesses should make them electronically, in a structured format and conform to the technical requirements of ZATCA.
According to the specific guideline published by ZATCA, the E-Invoicing (Fatoora) Detailed Guide, the credit and debit notes are included in the definition of electronic invoices. A note should have VAT tax number of the seller, buyer, the reference to the original invoice, the date of such note, and the information about the value and VAT which are being corrected.
ZATCA actively follows these rules by the means of its Fatoora portal where companies registered on Phase II of ZATCA e-invoicing will have to integrate their ERP or billing systems. In phase I, which was launched in December 2021, electronic invoices and notes had to be generated. Phase II, which will be introduced in phases starting in January 2023, will require the real-time reporting or clearance of notes and invoices to ZATCA as well as structured XMLs.
These XMLs are based on special schemas agreed upon by ZATCA which are commonly known as ZATCA e-invoicing sample XML and which provide the structure upon which invoice and note data should be organized. Failure to do so may lead to rejections or punishment.
Timing and Issuance Requirements
The ZATCA guidelines define the rigid time limits in the issuance of the credit and debit notes. Overall, they should be issued within fifteen days following the expiry of the month when the change in supply took place. This will make sure that the adjustments are reflected on the appropriate period of VAT KSA and that the supplier and buyer have a synchronized record of VAT.
In the case of vouchers, face-value vouchers are considered to be due at the time of redemption. The date of tax payable on benefit vouchers is based on the date of deemed benefit or supply.
According to ZATCA e-invoicing Phase 2, all credit and debit notes are to be issued in electronic format with reference to the original invoice unique number and containing information on such details as the issue date, value corrections, and the new VAT values. The electronic notes should also include a QR code as it is mandatory.
These documents are checked with the master database on the ZATCA Fatoora portal, and its transactions are checked using the VAT lookup or VAT tax number of each entity. This will assist in proper reconciliation of VAT returns and limit fraud or claimed twice.
Content Requirements
All credit notes or debit notes issued under KSA VAT should consist of some mandatory information to become valid. These are the legal names, VAT tax number of the supplier and buyer, serial number of the note, to date of issue, reference to the original tax invoice and adjustment of value and VAT made.
Under the e-invoicing regulations, such details should be provided in human-readable (PDF/A-3) and machine-readable (XML) formats. These fields are determined by the ZATCA e-invoicing sample XML structure to guarantee the integrity of data and its conformity with the clearance system or the reporting system.
In the case of vouchers, the businesses should record the serial number or the tracking number of the voucher, the face value, the date at which the voucher was issued and the redemption. When combined with an ERP solution such as SowaanERP, these records are automatically connected to the accounting and the e-invoicing modules and the process of issuing, redeeming, and reporting vouchers to ZATCA becomes easier.
Such records are, therefore, necessary in case of an audit or when preparing VAT returns, especially when a review by ZATCA is conducted under its withholding tax Saudi Arabia ZATCA or VAT compliance schemes. Having digital audit trails is a way of ensuring compliance as well as reducing risk when ZATCA audits are conducted.
What it means to Your Business and what SowaanERP can do
In the case of businesses operating in Saudi Arabia, particularly the SMEs, e-commerce merchants, and service providers, proper management of credit notes, debit notes, and vouchers is an essential element of VAT compliance. Wrong or late issuance may interfere with your filings of VAT return KSA and make your business vulnerable to various penalties. Besides, with ZATCA ongoing with its e-invoicing expansion and further data validation measures, manual processing is no longer acceptable.
Here, SowaanERP will be a strategic partner. The platform will be integrated with the ZATCA e-invoicing Phase 2, whereby all invoices, credit notes, and debts notes will be automatically formatted in the right ZATCA e-invoicing sample XML format and sent to the ZATCA Fatoora portal automatically. The system of SowaanERP automates the process of referring to the original invoice and automatically calculates VAT changes and provides all the fields of data that ZATCA may need.
Also, in the case of businesses that issue or redeem vouchers, SowaanERP allows full tracing, i.e. of vouchers issued to date and date of redemption, such that VAT is only realized when payable. The solution is also integrated with other tax modules which enable businesses to handle income tax in Saudi Arabia, withholding tax and VAT compliance in the same system.
Using automated digital audit trails, SowaanERP will simplify compliance, as well as equip your organization to take part in future tax modernization projects in the Kingdom. The outcome is a hustle free audit, quicker reconciliation, and total peace of mind.
Conclusion
With the changing tax environment in Saudi Arabia, the compliance is increasingly data and technology-driven. The effective use of credit notes, debit notes and vouchers is no longer an accounting process but a requirement of compliance of ZATCA e-invoicing Phase 2.
Knowledge of timing to issue these documents, format and reporting of such documents electronically is important as a business is likely to avoid penalties and accurate reporting in VAT KSA filings. Through innovative solutions such as SowaanERP, the organization has been able to have invoice and note management that are fully automated to ensure that the ZATCA regulations are followed to the letter, with the organization still remaining efficient in its operations.
To make an easy transition into invoicing that is compatible with ZATCA and implement changes, please contact SowaanERP today to organize a demo of our e-invoicing compliance module and receive a free system audit to meet your VAT and e-invoicing requirements.
FAQs
No, you cannot draw a credit note without an original tax invoice because you have to refer to the tax invoice to change the value or VAT charges in accordance with ZATCA standards.
A face-value voucher that is redeemed is subject to VAT and a benefit voucher may be considered as a supply immediately where it is a direct benefit.
In case a debit note is issued late, the adjustment should be made in VAT return in the period of issuance of the debit note and late reporting can be subject to penalties.
The credit note value has been reported as a decrease in the taxable sales and VAT amount owed at that period in the VAT return so that the net payable of VAT will be correct.
A simplified invoice is granted to consumers by a ZATCA and should contain the name of the supplier, VAT number, date of issue, total sum, VAT structure, and an obligatory QR code (XML).
Credit note automatically decreases the value of an original invoice (e.g., goods returned SAR 1,000). It is added with the help of a debit note (e.g., SAR 500 added later because of the extra service). They have to mention the initial invoice according to the regulations of ZATCA e-invoicing.
