VAT to be tripled in Saudi Arabia to 15%

Saudi Arabia, the second largest oil producing nation in the world, has for the last few years been trying desperately to diversify its economy and reduce their dependence on the export of oil.

Despite being relatively successful in recent years, the country has been hit hard by the double-edged sword of the Covid-19 induced demand-side shock and the plummeting price of oil on global markets.

With oil revenues in the country falling by 22% in the first quarter of 2020 compared to a year earlier (that’s a whopping loss of US$34 billion!), Saudi Arabia has had to spend big in order to try and keep the economy afloat. This has resulted in a $9 billion budget deficit in the first three months of the year.

The latest measure to combat the economic woes from the oil price slump and the spread of the coronavirus is a 10% increase in VAT from 5% to 15% which will take effect from June 1^st.

VAT, standing for Value Added Tax, is a tax on consumption. It is charged on a product at every point of sale where value has been added.

So in Saudi Arabia for example, from June 1^st a consumer would have to pay 15% VAT on any purchase. That $5000 Rolex watch you wanted, well it’s going to cost you $5750 now! Why? Because $5000 is the cost of the product, and 15% of that is $750, and there you have it, add them up and that’s your price: $5750.

It is hoped by policy makers in Saudi Arabia that the increase in VAT will lead to a large increase in government tax revenue, which is much needed in the face of the $9 billion-dollar budget deficit from quarter one.

Whilst VAT is a large source of government revenue, and a 10% increase is significant, the country will be hoping that the upward pressure it puts on prices will not deter consumption. If this was to happen, the new policy may stifle aggregate demand at a time when they desperately need it to be growing healthily.