Riyadh – Decypha: As part of the 2030 Vision and the National Transition Programme, the contribution of the non-oil sector in the Saudi economy is set to increase through adopting some economic reform measures such as imposing taxes, to reduce dependence on oil.
Residents of the Saudi kingdom, which has long been tax-free to attract investors, has cut fuel and utilities subsidies, frozen some mega projects, reduce the salaries of ministers and fixed the wages of civil servants.
Targeting a reduction of SAR 297 billion budget deficit, the Saudi government plans a major change in their economic policy through introducing a series of new taxes by 2020, with the most significant one is a 5 % value-added tax (VAT), slated for January 2018.
Last week, state announced it will impose a selective 100 % tax on cigarettes, 50% on soft and energy drinks, to start as of June 10, according to Khaleeji Times. As these two provisions will be the first of its kind in the energy-rich country, they are expected to boost non-oil state revenues.
Dubbed selective, as it is applied on certain goods, the tax was applied specifically on these three products, for being harmful to the health and finance of individuals, and also comes in line with the kingdom agreement with World Health Organization (WHO) to raise prices of these products to limit their consumption.
Selective Tax and VAT
In line with recommendations of the International Monetary Fund (IMF), the six-nation Gulf Cooperation Council (GCC) proposed imposing selective tax and value added tax (VAT) to help them overcome the instable economic environment that resulted from low crude prices.
The selective tax is imposed on products that are deemed harmful to people’s health and the environment, as well as some luxurious items. While, the VAT is applied on a certain set of products and services; it is levied at each process of the supply chain, and then added to the final price of the product to be paid by end user.
Even at a modest rate of 5%, the VAT is expected bring in cash to the state worth 1.6% of GDP in Saudi Arabia’s case, Oxford Business Group stated in a 2016 analysis.
In the long-term, the selective tax and VAT would benefit the Saudi budget, which plans to increase non-oil revenues by SAR 152 billion by 2020, however, their application is expected to burden taxpayers with costs, according to Oxford Business Group analysis.
The low VAT rate is considered suitable to the Saudi market, which has always had minimal contribution of taxes to the GDP. Between 2012 and 2014, the tax revenues represented 1.4 % of the GDP, according to IMF estimates.
Both taxes in Saudi Arabia will be collected by the Zakat Authority to ensure taxpayers abide by the law and avoid tax evasion.
Impact on Saudi’s Economy
The selective tax is predicted to raise between SAR 8 billion and SAR 10 billion on an annual basis, state officials said, according to Arab News.
More revenues surrounding the tax are also expected as it will also be applied on importers of the taxable goods, along with some penalties such as imposing fines on importers of these goods, halting their activity and their licenses, attorney at Hazim Al Madani Law Firm, Dana Almutairi, explained on HG Legal Services.
Introducing new taxes and cutting subsidies might harm the economy as well, CNN Money stated in a December report, highlighting that these measures could have negative impact on low income families. But cutting capital spending, government operations, wages and retirement benefits alone are not enough, the Fiscal Balance Program 2020, stated in December, urging taking more actions.
However, Head of Tax, KPMG in Saudi Arabia and the Middle East and South Asia, Rupert Pease, was optimistic about the new taxes, suggesting higher percentage for the VAT, “5 % is very low compared to other countries where VAT was introduced many years ago. For example, in UK the VAT rate is 20 %, and France 23 %,” he said.
On the selective tax, Pease said it will cause doubling the price of a pack of cigarettes, and will mostly affect imported products. Other products like cooking oil, bread, rice, vegetables and water, medicine and health care will not subject to the tax.
“The introduction of tax is never popular, but it is an essential necessity to support the country’s economy. The provision of infrastructure, education, health care, defence, and policing, among others, is an indication of a healthy and well-to-do economy that will ultimately attract more foreign investors,” he said.
Taxes have always been a safe policy for governments to boost their revenues, with the collection method considered its challenging issue, however, indirect taxes, including selective tax and the VAT are deemed more secure to collect as they are added to the final price of products, increasing the potential for the Saudi government to reach its target.
By Doaa Farid
