Surprising move by KSA to boost its Economy – Increase in VAT rate by 200% Impact on consumers, economy and businesses

COVID -19 crisis wiped out at least $ 17 trillion from stock markets globally as trade comes to a standstill and countries went into lockdown. The crisis produced economic shocks like the unprecedented decline in oil demand which led to lower oil prices and sharp decline in oil revenue heavily affecting the world’s biggest crude exporter Kingdom of Saudi Arabia and increased the budget deficit. Further the precautionary measures to prevent the spread of virus led to suspension of economic activities and non-oil revenue and economic growth. These challenges led to decline in public revenue and exerted pressure on public finances. Kingdom of Saudi Arabia (KSA) in order to combat the crisis situation has decided to increase the VAT rate from 5% to 15% from July 2020.

Impact on Consumers:

A two times increase in indirect tax will affect the final consumers who will be burdened with higher cost of all daily items of consumer needs like food products, vegetables etc. It will further led to increase in cost of meal in restaurants, take away, ticket costs of movie theatres, salons etc.. Cost of commercials rentals and real estate will go up. It will lead to overall increase in cost of living for the residents.

Impact on Economy:

Increase in VAT rate will increase the revenue of the Government but will lead to sudden increase in cost of living which will negatively affect the economy and lead to inflation in the country. Also, the increase in VAT rate can also lead to higher chances of tax evasion and eventually loss to Government.

The burden of tax can be reduced to an extent if the government excludes certain necessary household goods or foodstuffs from the VAT, increase in no. of transactions on which taxes is to be collected rather than 200% increase in tax rate. Attention should be given to protect the poorer members of society from the cost increase.

Impact on Businesses:

Businesses selling directly to the final customers especially in the fast-moving consumer goods and services sector would experience pressure to remain competitive and may have to absorb part or all the VAT increase so that the price of goods and services are not affected.Businesses whose goods or services are VAT exempt would experience an increase in cost as they are not able to claim input VAT incurred since their products are exempt.

Impact on existing ongoing contracts:

Taxpayers would also need to review existing contracts that provide for ongoing or periodic supplies of goods/service as well as the resulting system and documentation changes that should be effected internally before the effective date. Tax payers would also need to consider the impact of the change on their business.

Impact on Imports:

VAT is to be paid in cash at the time of import of goods in Kingdom of Saudi Arabia. Increase in tax rate will lead to Increase in cash flow in hands of government due to VAT paid in cash in advance at the time of import and claiming of VAT credit will be later at the time of filing return after 3 months however it will have a major negative impact on cash flow of companies.

Legality of Increase in VAT rate:

Supreme Council in its 36th meeting, decided common imposition by GCC States a VAT rate of 5% and accordingly a “Common VAT Agreement of the states of Gulf Cooperation Council” was passed with a common tax rate of 5% amongst all GCC nations.

Is the increase in tax rate by KSA legally justified? Can it follow a tax rate different from other GCC nations like UAE and Bahrain who are following 5% VAT rate? Or will this lead to increase in tax rate amongst all GCC nations including UAE. In coming days we will witness the answers of these questions;

How MBG Can Help:

With this in mind, it is an opportune time for tax registrants to prepare themselves for the changed VAT environment in GCC. One of the best ways to prepare for this is to undertake a vat review/ impact study to examine key areas of tax compliance for contracts and the other controls thereon. A high-level review or impact study may highlight key compliance controls areas where more attention is required. MBG’s tax professionals are experienced in providing tax related services that bring together our knowledge and experience in taxation and related internal controls. These Vat review/impact study will be targeted towards enabling clients to undertake any necessary preventive action before a surprising move from the government.