Saudi, UAE introduce VAT in first for Gulf

The five per cent sales tax introduced by Saudi Arabia and the United Arab Emirates applies to most goods and services.
The five per cent sales tax introduced by Saudi Arabia and the United Arab Emirates applies to most goods and services.PHOTO: REUTERS

DUBAI (AFP) - Saudi Arabia and the United Arab Emirates introduced value-added tax (VAT) from Monday (Jan 1), a first for the Gulf which has long prided itself on its tax-free, cradle-to-grave welfare system.

Saudi Arabia compounded the New Year blow for motorists with an unannounced hike of up to 127 per cent in petrol prices with immediate effect from midnight.

They are the latest in a series of measures introduced by Gulf oil producers over the past two years to boost revenues and cut spending as a persistent slump in world prices has led to ballooning budget deficits.

The five per cent sales tax applies to most goods and services and analysts project that the two governments could raise as much as US$21 billion (S$28 billion) in 2018, equivalent to 2.0 per cent of GDP.

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.

The hike in fuel duty in Saudi Arabia was the second in two years.

But it still leaves petrol prices as some of the lowest in the world.

Duty on diesel and kerosene remained unchanged.

Saudi Arabia has introduced a raft of measures to raise revenue and cut spending as it bids to balance its books.

Last month, it slashed the government subsidy on electricity supply, leading to a sharp rise in bills.

Riyadh posted budget deficits totalling US$260 billion over the past four fiscal years and does not expect to balance its books before 2023.

To finance its mounting public debt, the kingdom has withdrawn around US$250 billion from its reserves over the past four years, reducing them to US$490 billion.

It has also borrowed around US$100 billion from the international and domestic markets.