According to the official sources, the International Monetary Fund or commonly known as the IMF with a consultation with the other Gulf countries has asked Saudi Arabia to double the Value Added Tax (VAT) from 5% to 10%.

According to the analysts, this double VAT can only be implemented by 2021. This increased VAT would be implemented across the GCC countries once Kuwait and Oman are ready to implement it. The custom unions are to be taken in confidence as well.

Saudi Arabia has collected revenues better than expectations

IMF stated that the implementation of VAT in the Kingdom of Saudi Arabia since January 2018 has allowed the Saudi government to collect revenues more than expectations. The registration threshold at the beginning was reduced at the beginning of 2019.

The entire process was carried out smoothly and successfully. The IMF staff, who presented the report has urged that the VAT shall be raised from 5 to 10 percent as per consultation with other GCC countries.

Thaddeus Best, who is an analyst at Moody’s Sovereign Risk Group, is of view that the VAT rates across the GCC countries would be the same as all the GCC countries would like to avoid the tax arbitrage opportunities. However, the GCC countries have shown hesitation in the implementation of 5% VAT in 2018.

Thereby we can expect some differentials in VAT across the GCC countries. However, they shall be minor differentials of temporary nature.

Only 3 countries have implemented VAT so far

Currently, out of 6 countries, only 3 GCC countries i.e. Saudi Arabia, the UAE, and Bahrain have implemented the VAT. The VAT rates are unlikely to be increased until the other GCC states implement the VAT.

Best also added that the GCC countries like Kuwait and Oman won’t be implementing VAT until 2021: they aren’t ready so far. Only after 2021 when Kuwait and Oman have implemented VAT, we can expect an increase in the VAT rate to 10% in KSA and UAE.

However, a sharp decline in oil prices can push the governments to increase the VAT rate, nevertheless we do not conclude it as a baseline view, says Best.

The Kingdom’s non-oil revenues have increased by 59 percent, since the last year. All is credited to the VAT, excises, expatriate levy, and proceeds from the settlement agreements. According to IMF, it is excepted that by 2024, VAT shall have a 2% share in the GDP of KSA by 2024.

Why Double the VAT in KSA?

Even though VAT implementation has allowed the Saudi government to collect revenues more than expectation, yet the IMF believes that more needs to be done. Vision 2030, which is a vision endured to make KSA less vulnerable to oil price shock is still in the development stage as 70 percent of public revenues, at current come from oil-based revenues.

In 2018, Saudi Arabia was able to collect $12.5 billion as VAT revenues. This allowed the Saudi GDP to grow by 2.4 percent. Yet it is viewed that OPEC will cut oil prices down, calling for a decrease in GDP growth to 1.9%. thereby IMF has asked the Saudi government to work on reforms.

The VAT rate shall increase to double and they also need to consider the unemployment rate which is 12.5 percent. One million new jobs are needed for citizens over the next five years.

Source: Arabian Business