Saudi Arabia Expects VAT to Increase Cost of Living by 5 Percent

Published August 13th, 2017 - 09:31 GMT
The new Value-Added Tax (VAT) will be implemented in Saudi Arabia from January 1 next year simultaneously with other GCC countries. (File photo)
The new Value-Added Tax (VAT) will be implemented in Saudi Arabia from January 1 next year simultaneously with other GCC countries. (File photo)

The General Authority of Zakat and Tax (GAZT) in Saudi Arabia has announced in the official gazette that August 26 will be the last date for registration of all business establishments with annual turnover of SR375,000 or more for smooth implementation of the new Value-Added Tax (VAT) from January 1 next year simultaneously with other GCC countries.

The VAT law is based on the principles agreed in the Unified GCC Agreement for Value-Added Tax (VAT) published in the official gazette on April 21 this year.

As per GAZT guideline based on unified GCC agreement, VAT will be imposed on all goods and services at the rate of 5 percent of the cost of good or service sold.

However education, health care, real estate and local transport is left to the discretion of each member state (i.e. whether these sectors are subject to tax at standard rate, zero rate or are exempt).

VAT is an indirect tax applied upon the consumption of most goods and services. VAT is levied by VAT registered businesses, which make supplies of goods and services in the course or furtherance of their business. VAT will also apply on the importation of goods.

Although VAT will apply to most goods and services, there are some likely exceptions: this includes basic food items, essential medicines and exports of goods and international services, which are expected to be zero rated supplies.

Furthermore, other supplies such as healthcare, education, sale or lease of residential property and finance and insurance are expected to be exempted.

VAT is levied at each stage in the supply chain and is collected by businesses on behalf of the government. VAT is ultimately incurred and paid by the end-user.

Economists call VAT as charge on consumers and not companies, producers or service providers.

Essentially, under VAT law business establishments, service providers and manufacturers and importers are a bridge between GAZT and the end-user called consumer or in simple English the common man.

The basic impact of VAT will be burdened by ordinary end-user and not the business houses.

According to VAT Law when a manufacturer, service provider or a retailer writes a bill it adds 5 percent to the original amount and if the amount is billed to an end-user then the story ends there.

But if, for example, a service or good is sold to a company which is not an end-user and uses the good for further sale to the end-user then it too will add 5 percent to the invoice. The business establishments that paid VAT but are not end-users will get back the 5 percent VAT from GAZT.

VAT will be the second in line tax on all people in the Kingdom this year. The GAZT first imposed selective tax on cigarettes, energy drinks and soda drinks. It also increased visit visa fee, exit re-entry fee and dependent fee for expatriates.

The VAT is expected to generate around SR57 billion to the national coffer giving a fillip to Vision 2030.

Economists believe that VAT may not pinch consumers and end-users as much as selective tax and increase in taxes on expatriates. They agree that already burdened with additional taxes and increase in other fees, now the VAT will add to the hardship of expatriates, especially the blue collar worker and people in the middle income group.

By Saeed Haider


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