Saudi Arabia and the United Arab Emirates (UAE) introduced the Value Added Tax (VAT) for the very first time on 1 January 2018. The move is a first for the Gulf region, which has long boasted of a tax-free system.
VAT is a five per cent tax that will be levied on most goods and services to boost revenue. It will be applied on food, clothes, electronics and gasoline, phone, water and electricity bills, as well as hotel reservations. Some services that will be exempted from the tax include medical treatment, financial services and public transport.
Organisations such as the International Monetary Fund have long called for Gulf countries to diversify their sources of income away from oil reserves. In Saudi Arabia, more than 90 per cent of budget revenues come from the oil industry while in the UAE it is roughly 80 per cent.
According to the estimated projection by analysts, the introduction of the taxation system will enable both the nations to raise as much as $21 billion in the year 2018. The raised revenue will be utilised by the governments for infrastructure and developmental works.
Steps already implemented by both nations to boost government revenue:
Saudi Arabia: The Gulf nation has implemented a tax on tobacco and soft drinks. It has also introduced a cut in some subsidies offered to locals
UAE: The road tolls were hiked and a tourism tax was introduced.
The other members of the Gulf Cooperation Council Bahrain, Kuwait, Oman and Qatar have also committed to introducing VAT, though some have delayed their plans until 2019.
However, the nations have no plans of introducing the income tax, which is a tax imposed on individuals or entities that varies with their respective income or profits.