Treatment of VAT on the Rejection / Discounts availed by the Insurance Companies in The Kingdom of Saudi Arabia (KSA) under Health Care Sector

GCC Countries have been given Right to exempt or levy VAT @0% (1) on certain Sectors viz:

1. Education;
2. Healthcare;
3. Real Estate; and
4. Local Transport.

Kingdom of Saudi Arabia (‘KSA’)exercised the right and beginning 1st January 2018, applied Zero-rated VAT on the supplies of Qualified Medicines and qualified medical equipment’s, issued by KSA Ministry of Health and Saudi Food and Drug Authority (‘SFDA’). List can be found on www.vat.gov.sa or https://www.customs.gov.sa/en/Integrated-Tariff

Meaning those Medicines and Medical equipment’s, which are not part of the list issued by the Competent authority, are subject to VAT at 5% Standard rate.

Further to the above, the beloved King of Saudi Arabia and His Royal Highness Crown Prince vide Royal decree (2), took measure to reduce the burden of the increasing Cost of living on its Citizens / Nationals, and reduced the rate of VAT from standard 5% to 0%, on the Private healthcare services availed.

However, to avail the benefit of Zero Rating, the Private Healthcare Services must capture the National Identity Number of Saudi Nationals on the face of Tax Invoices and are required to submit the same during VAT Audits.

In absence of the National ID numbers, such supplies,even though made to Saudi Nationals, shall be treated as Standard supplies, and 5% VAT will need to be paid.

Note that, zero rating of Private Healthcare services are strictly restricted to Saudi Nationals and that VAT @5%, will be charged by the Private healthcare services, provided to Foreign nationals / Expatriates. The Foreign Nationals / Expatriates may only avail zero rated VAT on the QualifiedMedicines / Qualified Medical Equipment’s and NOT on private healthcare services.

In the Healthcare Services, a very important role has been played by the Insurance Companies. Many a times, patients appoint an Insurance Company directly, or the Employer appoints an Insurance Company for the wellbeing of its Staff.

Private healthcare Company issues Tax Invoices directly on the patients or to the Insurance Companies, as per the Contractual agreement agreed upon.

With the above background, we shall now discuss the treatment of VAT on the Discounted prices / Rejection of Invoices by Insurance Companies. 

The following scenarios are explained with:

Note 1 - Though the benefit of healthcare services are availed by the Saudi Citizen, primary recipient for the purpose of VAT is the Insurance Company.

Usually, Private healthcare service providers enter into an agreement with Insurance Companies and:

1. May offer discounts like Prompt payment discount, Volume Discount, other periodic discounts etc., on the supplies provided; and
2. And at times, the Insurance companies rejects the Invoices, in part or in full, citing the Services provided to the Patients are not covered by the Insurance.

In the 1st scenario, if the Discounts are provided on the face of Tax Invoices then VAT shall be calculated on the Net Discounted price.

Interestingly, in the 2nd scenario there are two sub-scenarios, which are discussed below:

1. Healthcare service provider supplies directly to the patient and if the Patient is not willing to pay the entire amount as per the Tax Invoice, then the health care service provider may write off such debts as Bad Debts. (Here in this article, we shall not touch base upon the provisions of bad debts); and
2. Healthcare service provider supplies directly to the Insurance Company and the Insurance company rejects the claim at a later stage, then the Healthcare service provider may issue a Credit Note to the Insurance company, whereby claiming back the VAT paid on the Original Tax Invoice issued.

However, as per the provisions (3) one of the pre-requisites is‘Credit Note issued in accordance with this article must contain a reference to the sequential number of the Tax Invoice issued in respect of the initial supply…...’

As the settlements, are undertaken by the Insurance Companies with the Private Healthcare service providers,usually on quarterly or half yearly or on yearly basis, and also practically, there will be scores of Tax Invoices Issued by the Healthcare service provider on the Insurance Company, it will be a huge task to establish, one on one nexus between the Credit Note issued against the Original Tax Invoice reference number.

This will surely be a matter of litigation during the VAT Audit stage and Business are advised to be extremely careful in proper compliance of the Law, else there may be Penalties imposed on such non-compliance.

Hope that General Authority of Zakat and Tax (‘GAZT’) may issue a clarification on the above sooner than later.

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