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Saudi triples VAT to 15%

Dubai - Tripling the VAT to 15 per cent could generate up to five per cent of GDP in non-oil fiscal revenues.

Saudi Arabia on Monday hiked value-added tax (VAT) three-fold to 15 per cent and also suspended cost of living allowance as part of austerity measures to support economy against Covid-19 impact and increase non-oil revenues.
Mohammed Al Jadaan, Saudi Arabia's finance minister, said this decision has been taken after pandemic hits government revenues, therefore, requiring the government to cut expenditures and introduce measures to support stability of non-oil revenues.
"The measures are painful but necessary," said Al Jadaan, adding that suspension of allowance will come into effect from June 1, 2020.
Analysts said these are pro-austerity and pro-revenue moves rather than pro-growth ones.
"The new fiscal austerity package will help offset a portion of this year's revenue loss caused by the sharp decline in oil prices and lower oil production. It also points to the government's capacity to adjust to shocks. The new spending cuts, together with those already announced in March and those approved in the 2020 budget, are equivalent to nearly eight per cent of GDP," said Alex Perjessy, a vice-president at Moody's Investors Service.

SAR100 billion boost
Perjessy said tripling the VAT to 15 per cent could generate up to five per cent of GDP in non-oil fiscal revenues.
Hasnain Malik, head of equity strategy at Tellimer, said the VAT increase could add about SAR90 billion to SAR100 billion of addition non-oil revenues.
"Amid salary cuts and job losses, this crushes consumer spending further. But the VAT increase is a necessary step towards fiscal sustainability. The old model of fiscal largesse during downturns is finally exhausting. But that model was not sustainable. There will be other changes eventually, including public sector wages and subsidies," said Malik.
Shailesh Dash, board member, Allied Investment Partners, said lower oil prices have adversely impacted the budgetary needs of Saudi Arabia and the country has no choice but to diversify its revenue sources to maintain a right fiscal discipline.
"I believe this is important for the government to manage its finances by generating additional revenue to cover up economic slowdown due to coronavirus outbreak," Dash said.
James Reeve, chief economist at Samba Financial Group, said the big surprise was the tripling of VAT, which was not on anyone's radar.
"The removal of the cost of living allowance and, I suspect, annual allowances, will provide a similar boost to government coffers of about 45 billion riyals. Overall, we now see a government budget deficit this year of around SR263 billion or 9.4 per cent of GDP. This is still very large but is a considerable improvement on the 13 per cent of GDP deficit that the government was facing previously."
John Sfakianakis, Gulf expert at the University of Cambridge, said tripling the VAT will test the limits of the balance between revenues and consumption as the economy dives into a deep recession.
The Kingdom will also reduce allocations for some projects that are part of Vision 2030 with a total value of SR100 billion.
It also decreased its planned 2020 spending by five percent to reduce the impact of low oil prices. - waheedabbas@khaleejtimes.com