Saudi VAT triples to 15% as part of austerity measures

Saudi Arabia risks becoming less competitive than other Gulf countries that have so far kept it no higher than 5%.
Wednesday 01/07/2020
Shoppers walk past jewellery shops in the capital Riyadh before the increase in the VAT rate. (AFP)
Shoppers walk past jewellery shops in the capital Riyadh before the increase in the VAT rate. (AFP)

RIADH - Saudi Arabia’s decision to triple its value-added tax (VAT) from 5% to 15% came into effect Wednesday, as stores opened up again following weeks of lockdowns and restrictions due to the coronavirus pandemic and during an austerity campaign caused by record low oil prices and closures.

As the economy weathers the hardship, Saudis generally accustomed to a high standard of living are trying to adapt to the new economic reality. The decision to impose a VAT has sparked controversy since it was introduced at 5% in 2018.

For decades, Saudi citizens received financial help and benefits from the state and paid little taxes. Today, they have to comply with austerity measures, including increased VAT and the absence of a monthly allowance previously provided to employees.

“Wednesday, July 1, 2020, the decision to raise the value-added tax rate to 15% came into effect on all goods and services subject to it in commercial markets, after the announcement of Royal Order No. (A / 638) on the eleventh of last May to amend Article (II) of the value added tax regulation, which included raising the tax rate from 5% to 15%,” state news agency SPA reported.

Finance Minister Mohammed al-Jadaan said when he announced the increase in May that “these measures are painful but necessary to maintain financial and economic stability over the medium to long term amid a sharp decline in oil revenue and the coronavirus impacts.”

The International Monetary Fund (IMF) expects Saudi Arabia’s GDP to shrink by 6.8% this year, marking its worst performance since the 1980s. Riyadh’s budget deficit will more than double from last year to hit 11.4% of gross domestic product (GDP), but is expected to go down to 5.6% of GDP in 2021, according to the IMF.

The virus has also stripped the kingdom this year of billions of dollars in revenue from the hajj pilgrimage, which normally draws 2.5 million people for five intense days of worship in Mecca.

A general view of the car market as people gathered to buy vehicles before the increase of VAT to 15% in Riyadh, June 27. (AFP)
A general view of the car market as people gathered to buy vehicles before the increase of VAT to 15% in Riyadh, June 27. (AFP)

Although the VAT increase is due to the unprecedented health crisis and oil price decline, the decision to impose taxes in Saudi Arabia was first introduced two years ago as part of its ambitious Vision 2030 programme, which aims to reduce the kingdom’s reliance on oil revenue and diversify its economy.

To beat the surge in taxes, Saudis have filled malls, supermarkets and some car dealerships in recent days as stores opened up again following weeks of lockdowns.

Since last week, there has been a significant increase in sales, from homes to cars, home appliances, jewelry, gold, etc., before the expected VAT increase.

“Air conditioner, TV, and electronics, I bought all that I need a week before the new tax comes into effect”, a teacher in Riyadh told AFP. “I will not be able to buy it after Wednesday,” he added.

Cars were also jammed at the Saudi-Emirati border for two weeks as people attempted to enter the kingdom before the new tax came into effect.

The firm austerity measures shows that high spending in Saudi Arabia is a thing of the past, and the world’s largest oil exporter is really changing.

Other Gulf countries, like Kuwait and UAE, have also introduced VATs, but experts said that Saudi Arabia risks becoming less competitive than other Gulf countries that have so far kept it no higher than 5%.