Gulf states acclimatise to VAT in quest to diversify economies

Since the turn of the year, the people of Saudi Arabia and the United Arab Emirates have been adjusting to a concept previously alien to their oil-dominated economies – tax.

From January 1, prices charged for nearly all goods and services have included a 5 per cent supplement to cover Value Added Tax. The move is part of a Gulf-wide initiative to broaden out the economies of the region, lessening dependence on oil and stimulating growth in other areas. Bahrain, Kuwait, Oman and Qatar are due to follow at some point.

Although the VAT rate in the first two countries is modest, the price rises have naturally provoked howls of protest from consumers. Some took to social media to share snaps of receipts showing they had been overcharged by as much as 10 per cent, or that bills had been rounded up – but never down – for the convenience of retailers.

The higher prices have added to the already recent rude awakening for populations used to the government picking up the bill for public services and the cost of subsidising items such as fuel. Saudi Arabia, the UAE and other states in the region have already cut subsidies on petrol and energy in recent years to bring them closer to market prices.

Authorities in both countries have already acted to smooth out the wrinkles after spending months in the run-up educating their populations about the benefits of taxation in modern diversified economies. In the UAE, consumer protection teams have been cracking down on businesses found to be overcharging after 350 complaints were received in the first two weeks of the new VAT regime. Twenty businesses were fined for various infringements.

Both governments have pitched the introduction of VAT in the context of wider economic reforms. The need to introduce some form of taxation has been forced on the Gulf states by a steep fall in the world oil price from 2014. Saudi Arabia hit a record $98 billion budget deficit the following year.

Soon after the VAT plan was announced in May last year, UAE authorities assured the public that tax receipts would strengthen economic development and enable the country to compete with the world’s advanced economies. The Saudi authorities explained that VAT would provide a stable and sustainable source of funds to support the country’s ambitious programme of transformation.

Authorities have also moved to cushion the blow of rising prices. Just after VAT and higher energy prices came in at the start of the year, the Saudi authorities introduced a new financial support package that increased payments to government employees, students, retirees and other social welfare recipients.

Nonetheless, with the tax taboo broken, consumers and wage-earners are worried that other new charges cannot be far behind. The Saudi finance ministry has assured its citizens that they will not pay income tax as part of the kingdom’s reform programme. The VAT rate is also pegged at 5 per cent until at least 2020.

And as for the shudders running through the expat community – for whom the no-tax regime is one of the attractions of working in the Gulf – the Saudis have also said there  are no plans to tax expat incomes despite rumours of a planned 10 per cent rate.

According to Labour Ministry spokesman Khaled Aba Al-Khalil: “Whatever social media is circulating about the new tax on expatriates is totally untrue.”