The Impact of the Latest Fiscal Policy Reform in Saudi Arabia VAT Hike to 15%
By: Abdulmohsen Alkahtani – Managing Director
Abdelrahim Elbakheit – Senior Director
Kingdom of Saudi Arabia Ministry of Finance, His Excellency; Mohammed Al- Jadaan declared very important fiscal policy decisions to increase government revenue to coup with COVID-19 short-falls and current economic down-turn in the Kingdom economy. The most important decision is the increase of Value Added Tax (VAT) rate to 15% from the originally declared rate of 5%, which was implemented in January, 1st 2018. Such move is primarily aimed at improving fiscal balance of the Kingdom to cover the revenue gap that was resulted from the lock-downs because of COVID-19 pandemic.
In addition to VAT rate increase, His Excellency announce several important fiscal policy reforms including suspending cost of living allowances and cuts in some landmark related to 2030 Kingdom Vision Projects. As he indicated such reforms are aimed at overcome current economic difficulties that have been experienced locally and internationally. His Excellency; feels the needed reforms are considered immediate responses to decrease in crude oil demand that resulted in lower level of revenue to the Kingdom. Also, to overcome negative economic conditions resulted from the overall lock-downs measures that have halted all economic activities in the Kingdom since late February, 2020.
However, as an important notice here; we have to remind readers that the International Monterey Fund (IMF) had previously recommended and advised the Kingdom of Saudi Arabia and other GCC countries (adopting VAT) to increase the rate of VAT to overcome revenue short-fall as the result of falling oil prices long before COVID-19 crises.
VAT was implemented in the Kingdom of Saudi Arabia in January 1ST 2018. As the authorities in the Kingdom imposed 5% VAT rate. VAT implementation was huge success by all means, since revenue generated from VAT in 2018 was more than 53 billion Saudi Riyals more than was initially expected twice. The kingdom VAT system was originated on VAT treaty between GCC that was fist introduced in 2012. The VAT system was adopted accordingly from the European VAT system with some modifications to be suitable with Saudi laws and regulations as well as social customs.
VAT rules and regulations in Saudi Arabia exclude government supplies and fees and it refunds medical services and supplies. In addition, it excludes rent of houses for personal use and life insurance and all margin and interest finances. All Saudi Arabia exports are zero VAT rate to promote exporting activities and maintain the Kingdom competitiveness internationally. It also introduced restrictions to supplies of services made by KSA suppliers to recipients abroad, ensuring additional VAT revenue.
To conclude, Saudi Arabia reform measurements of fiscal policy decisions will have negative impact in shortterm because they will lead decrease in spending which will lead to lower demand in the economy and eventually lower supply by business organizations. On the other hand, an increase of VAT rate by 200% will increase revenue generated by the government and will lead to covering all short-fall and gaps to essential governmental projects as well as paying government dues without experiencing any delays and additional cost of finances. At the end, VAT increase by the authorities will eventually be adopted by all participants of the economic activities and become a norm.