DUBAI: The United Arab Emirates and Saudi Arabia, where residents had long enjoyed a tax-free and heavily subsidized existence, introduced International Monetary Fund (IMF)-backed value-added tax (VAT) on January 1, following an oil slump. A 5% levy is imposed on most goods and services to boost revenue as the collapse in crude prices since 2014 sparked cutbacks.
Although it threatens to slow economic growth at a time when it is already sluggish, the UAE is expected to raise around $3.3 billion from the tax. Meanwhile, Saudi Arabia, which unveiled the biggest budget in its history, plans to spend $261 billion this fiscal year as the government forecasts a boost in revenue from the introduction of VAT. As part of economic diversification efforts, the kingdom is broadening its investment base and boosting other non-oil income.
Saudi Arabia, the world’s biggest oil exporter and the largest economy in the Arab region, froze major building projects, cut cabinet ministers’ salaries and imposed a wage freeze on civil servants to cope with 2016’s budget deficit of $97 billion. It also made unprecedented cuts to fuel and utilities subsidies. It aims to balance its budget by 2020. The IMF has recommended oil-exporting countries in the Gulf introduce taxes as one way to raise non-oil revenue. The IMF also recommends Gulf countries to introduce or expand taxes on business profits.
The IMF mideast director Jihad Azour said VAT is part of a long-term tax reform to help Gulf states reduce their dependence on oil revenues. “We believe VAT is an important component of the fiscal adjustment and revenue diversification plans of GCC countries and these measure are necessary for long-term fiscal sustainability,” he said. Saudi Arabia and the UAE last summer imposed a 100% tax on tobacco products and energy drinks, and a 50% tax on soft drinks.
