Will Value Added Tax (VAT) be applied to employees salaries?

Saudi Arabia was a country that imposed zero or low taxes towards expats as well as nationals as it was enjoying great revenues from oil. But due to decline in the oil prices, Saudi economy suffered greatly and required alternative sources of revenues to continue a steady economic growth.

The economy required some vital steps to make it less vulnerable towards oil price shocks in future. The economy witnessed series of changes in its policies for the betterment of the nation. We heard of the expat dependent fee and the Value Added Tax as the most significant steps taken for the uplift of the economy.[irp]

As Saudis and residents of Saudi Arabia had never experienced VAT and dependent fee before, they raised many questions. Many became frightened and insecure. As soon as the dependent fee was imposed, people did calm down on it.

I don’t mean that those who criticize it are okay with it now, but the fact is that the hype that it created months ago has to an extent vanished. But now, VAT is still to be implemented. As VAT is certainly a new form of tax in Saudi Arabia, people are hesitant about it.

Even though authorities had been informing people about the rules and implementation connected to the Value Added Tax (VAT) people have questions. Every now and then I see posts concerned to the VAT. The VAT is a tax that would be applied from 1st of January 2018 in Saudi Arabia along with many GCC countries.

A VAT of 5% would be applied on certain commodities and services. The VAT is already implemented in about 160 states of the world. The VAT would help Saudi Arabia economically. According to estimates, VAT would be able to provide a boost of 25 to 30 billion Saudi riyals to Saudi economy.

The tax would be imposed on all stages of good before it becomes the final product. See every time you will add value to a raw material to turn it into a good, you will pay a tax over it! (Simple economics!) VAT is applicable on imported and exported goods.

The new query that was raised by people was that will VAT effect employees? Will VAT be applied on employee’s salary? Would an employee pay 5% of tax? Would VAT be applicable on expat employees? Would VAT be applied only on Saudi employees?

Well, certainly not. VAT, an indirect tax, is not applicable on the salaries of employees. The authorities have claimed that no VAT is to be implemented on the salaries of employees either the employees be Saudi nationals or expats.

VAT, however, will bring in change; with 5% of tax, the cost of living in Saudi Arabia would increase by 5%. Expats would go through a greater financial burden as they ought to pay the dependent fee. The studies reveal that the savings of expats are to go down. In near future, they will be paying a dependent fee, VAT and non-subsidized utility bills.

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Steve has vast experience in writing about Saudi rules, regulations, guides, and procedures.