DUBAI • Saudi Arabia and the United Arab Emirates yesterday introduced value-added tax (VAT), in 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 crude prices has led to ballooning budget deficits.
The 5 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) this year, equivalent to 2 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.
Riyadh 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 next year.
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, whose economy contracted by 0.5 per cent last year for the first time since 2009, has introduced a raft of measures to raise revenue and cut spending as it bids to balance its books.
Last month, it cut the government subsidy on electricity supply for the second time in two years, 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.
The new VAT drew acid remarks from Saudis on social media.
"They are even taking taxes on car parking. I am afraid they will next tax the air," wrote Mr Ahmed bin Fatima.