Saudi VAT Hike Reasons and Impacts
Triple blow of declining oil prices, decreasing revenues from non-oil businesses and surge in healthcare expenses due to COVID 19 has prompted Kingdom of Saudi Arabia to triple the VAT rate from 5% to 15%. New rate will be applicable from 1st July 2020 in KSA
As Saudi Arabia works toward its goals as part of Vision 2030, especially in relation to infrastructure spending, the increase in the rate of VAT could potentially help drive continued government investment, particularly in the context of low oil prices. Ultimately, sustainable government spending in an economy creates jobs, which in turn stimulates economic activity and growth.
As per GCC agreement, member countries can increase VAT rate and implement that rate after a period of six months, however this move of Saudi Arabia means the new rate is just six weeks away. This means businesses are on a time crunch to adapt themselves quickly to the new rate.
Businesses impacted by the increased VAT rate, will face a challenging decision as to whether to pass on the additional VAT to their customers, or absorb this cost to some degree. Many businesses may have no choice but to pass on the additional cost to customers, bound by long term agreements and fixed pricing, capping legislation, or a need to preserve profit margins.
On the cost of delivery, “Local moves will be impacted big time as the VAT component has increased by 300 per cent. For example, if a local move costs 500 Saudi riyals, with the new VAT rules, it could cost 575 riyals. “With companies working at a 10-12 per cent margin, this could be seen as a step that will increase product prices.
“Customers may refrain from buying non-essentials and luxury goods, but essential commodities must move.”
“Logistics is a derived demand, hence there will not be a significant impact on the industry. It is a matter of time to get accustomed to the new realities of life.”
Impact on Business:
Business will have to either increase their price to match up the rate or will have to absorb VAT rate due to stiff competition especially in FMCG and service industries. Also errors in calculation of VAT would result into heavy penalty as compared to that of 5% earlier.
Impact on Government:
Increase in VAT rate will increase the revenues but there are chances of tax evasion from Businesses too. However in the long run this will prove to be an effective measure ensuring a balanced fiscal position of Saudi Government.
Looking at a long term advantage, Saudi Arabian Government has acted quickly and decisively. Measures taken will help in improving its economy. Also guide it through navigating the global crisis
Action Points for KSA Businesses
- Amendments in Existing Contracts
- Transitional Supplies
- Continuous Supply of services
- IT System Changes for Taxpayers
- Documentation and other Compliances