Saudi Arabia and UAE start the new Year introducing VAT

6 years ago - Published in Finance, Fiscal & Legal

Saudi Arabia and the United Arab Emirates (UAE) introduced the Value Added Tax (VAT) for the first time from Monday.

It is a five per cent tax on most goods and services to boost revenue. The VAT will be applied on food, clothes, electronics and gasoline, phone, water and electricity bills, as well as hotel reservations, the BBC reported. The five percent sales tax applies to most goods and services and analysts project that the two governments could raise as much as $21 billion in 2018, equivalent to 2.0 percent of GDP.

Some outgoings were exempt from the tax or given a zero-tax rating, including medical treatment, financial services and public transport.

“The imposition of VAT will help to raise tax revenues of the Saudi government to be utilised for infrastructure and developmental works,” said Mohammed Al-Khunaizi, a member of the Shoura (consultative ) Council.

But it marks a major change for two super-rich countries where the mall is king. Dubai has long held an annual shopping festival to draw bargain hunters from around the world to its glitzy retail palaces.

Saudi Arabia has deposited billions of dollars in special accounts to help needy citizens face the resulting rise in retail prices.

The other four Gulf states – Bahrain, Kuwait, Oman and Qatar – are also committed to introducing VAT but have decided to delay the move until early in 2019.

Organisations such as the International Monetary Fund have long called for Gulf countries to diversify their sources of income away from oil reserves.

In Saudi Arabia, more than 90 per cent of budget revenues come from the oil industry while in the UAE it is roughly 80 per cent. Both countries have already taken steps to boost government coffers.

In Saudi Arabia, this included a tax on tobacco and soft drinks as well as a cut in some subsidies offered to locals. In the UAE, road tolls were hiked and a tourism tax was introduced.

But there were no plans to introduce income tax, where most residents pay zero per cent tax on their earnings.