Value Added Tax (VAT) is a relatively new introduction to the Saudi Arabian economy. Before it was implemented in 2018, Saudi Arabia was among a minority of countries in the world without any VAT system. Within this club were several of the Kingdom's neighbours, including the UAE, Bahrain, Oman, Kuwait, and Qatar. In the year 2016, a ground-breaking agreement was reached by all six nations of the GCC. The Common VAT Agreement promised to usher in a new era with its 5% VAT rate. The purpose behind introducing VAT was to generate additional revenues for the GCC economies and diversify revenue sources. So far, this move has been considered an objective success.
VAT in KSA: The Journey so Far
The rate of VAT in the country was initially set at 5%, which was considerably low for a major economy. However, at the start of the global pandemic, the Saudi Arabian government decided that the best course of action would be to introduce a higher rate of VAT to make up for the revenue losses. This rate was increased from 5% to 15%, with the new rate taking effect on July 1, 2020. This bolstered the government’s ability to provide economic stimulus and support the country during an economically challenging time.
The government has stated that this increased rate would be a temporary measure, but no end date is currently set. During a Reuters interview at the World Economic Forum in Davos, Mohammed Al-Jadaan, Minister of Finance for Saudi Arabia declared, “We will ultimately consider cutting the VAT but at the moment we are still replenishing the reserves.”
There are several goods and services that are considered zero-rated. This includes medicines, medical equipment, international transportation, metals for investment and exported items. There are also several goods and services which are exempt entirely, which includes the transfer of money, Islamic finance products, insurance, and residential real estate leases.
Saudi's VAT Landscape Compared to the Top 6 Global Markets
As VAT has become a global norm, Saudi Arabia's introduction of VAT in 2018 compares favourably with the top six global economies. Let's take a look at how VAT is implemented in these countries.
USA - The US is one of the few major world economies that does not implement VAT, but that doesn't mean businesses and consumers are off the hook. Instead, they must contend with a complex state-by-state sales tax system. Sales tax can vary from 2.9 to 7.25% depending on the state. In addition to this rate, local governments in 35 states also implement an extra sales or use tax ranging from 1 to 5%.
China – In China, VAT taxpayers are divided into two categories: general VAT taxpayers and small-scale VAT taxpayers. Within the general category, there are multiple VAT rates ranging across 13%, 9%, and 6%. The small-scale VAT rate is 3%.
Japan – The standard VAT rate in Japan is 10%, but certain products and services such as food (except for alcoholic drinks) and newspapers can benefit from a reduced rate of 8%.
Germany – VAT in Germany is set at 19% but customers can seek a refund if they live outside the country and if they are bringing the product with them when they leave.
India – In India, VAT varies widely depending on the goods that are being sold. The lowest rate starts at 5% and climbs to 12%, 18%, and 28%.
UK – The UK government sets VAT at a standard rate of 20%. Some goods and services can enjoy zero-rates, such as books, newspapers, and children's clothing.
As seen above, VAT rates vary significantly among the world’s six major economies and often its implementation can be quite complex. Saudi Arabia, with its 15% rate, has placed itself in a favourable position amongst these markets. The Kingdom’s VAT rate is not especially high, and the government has minimised complexity for businesses by keeping the rate uniform. This makes it easier for companies to invest in the country since they don't have to grapple with a complex taxation system.
The Future of VAT in Saudi Arabia
As the situation in Saudi Arabia continues to evolve, it's likely that the government will consider reducing its VAT rate in the future. In the meantime, the Saudi VAT rate will stay at a competitive level compared to other countries, and businesses will benefit from a simplified system. As such, businesses and individuals that want to invest in Saudi Arabia will find it an attractive option, thanks to the country's favourable VAT landscape.