The pros and cons of in­creas­ing value added tax

Arab News - - Business News - TALAT HAFIZ

Ef­fec­tive to­day, Saudi Ara­bia is tripling its value-added tax (VAT) to 15 per­cent, as part of fi­nan­cial re­forms in­tended to sup­port the fis­cal im­bal­ance be­tween pub­lic rev­enues and ex­pen­di­tures caused by the neg­a­tive im­pact of the coro­n­avirus crisis. Saudi Ara­bia rat­i­fied VAT and the ex­cise tax agree­ment of the Gulf Co­op­er­a­tion Coun­cil on Jan. 31, 2017. Pur­suant to the agree­ment’s pro­vi­sions, the gov­ern­ment has is­sued the com­mon tax agree­ment for both VAT and ex­cise tax.

The Gen­eral Author­ity of Zakat and In­come Tax is the Saudi gov­ern­ment body re­spon­si­ble for col­lect­ing VAT and ex­cise tax, and en­sur­ing that they are prop­erly levied. It is also re­spon­si­ble for ap­ply­ing penal­ties against vi­o­la­tors and tax evaders.

VAT and ex­cise tax are both in­di­rect taxes. But the former dif­fers from the lat­ter as VAT is usu­ally charged to goods and ser­vices ren­dered by the seller with a fixed and lower rate than that charged to ex­cise tax at ev­ery step of the sup­ply chain, from the man­u­fac­turer to the end con­sumer.

Ex­cise tax is usu­ally levied at a higher rate at the mo­ment of man­u­fac­ture on cer­tain goods that are con­sid­ered to be harm­ful to hu­man health, such as to­bacco (it could reach up to 100 per­cent of the sale price), en­ergy drinks and car­bon­ated drinks.

The mo­ment the Saudi gov­ern­ment an­nounced the tripling of VAT, a number of econ­o­mists raised con­cerns about the pos­si­ble neg­a­tive im­pact on busi­nesses, con­sumers’ pur­chas­ing power, con­sump­tion and in­fla­tion. I be­lieve the gov­ern­ment has cho­sen to ap­ply the least painful aus­ter­ity mea­sure to mit­i­gate these con­cerns, es­pe­cially when con­sid­er­ing that a wide range of goods and ser­vices are VAT-ex­empt, such as pri­vate ed­u­ca­tion, health-re­lated prod­ucts and ser­vices, and up SR850,000 ($226,718) of the price of the first house bought by a na­tional.

It is worth not­ing that de­spite the Saudi gov­ern­ment tripling VAT, it is still lower than in most de­vel­oped economies such as Den­mark, Swe­den and Nor­way, whose VAT reaches 25 per­cent.

One of the ex­pected pos­i­tive out­comes of rais­ing VAT is to ra­tio­nal­ize Saudi so­ci­ety’s con­sump­tion habits, which in turn will en­hance in­di­vid­u­als’ sav­ings by re­duc­ing the pur­chase of com­fort goods.

The gov­ern­ment is pur­su­ing the aus­ter­ity mea­sure with the least di­rect neg­a­tive im­pact com­pared to other solutions such as dis­miss­ing gov­ern­ment em­ploy­ees, re­duc­ing salaries, and freez­ing bonuses and pro­mo­tions.

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