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Saudi Arabia, UAE introduce VAT to help balance the budget

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Saudi Arabia and the United Arab Emirates have introduced a five percent value-added tax (VAT) on many goods and services in an attempt to raise budget revenues amid a global slump in oil prices.

The two Gulf countries had long prided themselves on being minimum tax havens fueled by energy export, but the downturn in the oil market has forced them into taking measures to tackle their huge budget deficits. The two Arab kingdoms will receive up to an estimated $21 billion from the new tax in 2018, equivalent to 2.0 percent of GDP.

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“The imposition of VAT will help to raise tax revenues of the Saudi government to be utilized for infrastructure and developmental works,” said Mohammed Al-Khunaizi of Saudi Arabia’s Shoura Council, as quoted by Arab News.

The VAT will apply to most products and services, including food, clothing, jewelry, electronics, phone, water and electricity bills, and hotel room bookings. Exceptions include air travel, healthcare, basic surgery and state-funded education. At five percent, the tax is still among the lowest in the world, but the Saudi Ministry of Commerce and Investment announced it will launch inspections to check which businesses don’t comply.

“The inspection tours will be directly supervised by the joint operation room for protection of consumers, which was approved by the Council of Ministers and composed of 18 government agencies,” it said in a statement cited by Arab News.

As well as the new VAT, Saudi Arabia also surprised motorists with an unexpected hike in gas prices of 127 percent, the latest in a series of measures to balance the books. The kingdom has had to freeze building works and civil servants’ salaries, and also recently cut back on electricity subsidies. Last year, Saudi Arabia and the UAE both imposed a 100 percent tax on tobacco products, and a 50 percent tax on fizzy or energy drinks.

READ MORE: Saudi Arabia plans to hike petrol prices by 80% … to just 44 cents per liter

The move towards VAT was made within the framework of an agreement between the member states of the Gulf Cooperation Council (GCC). Bahrain, Kuwait, Oman and Qatar – the other members of the GCC – will likely bring in their VAT at a later date.

There are not yet any plans to bring in an income tax in the Arabian Peninsula nations.

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