The decision to increase the value-added tax in Saudi Arabia from 5 to 15% came into effect on Wednesday, in the midst of austerity campaign caused by declining oil prices and closures linked to the emerging Corona virus.
Some traders reported this week that there was a significant increase in sales, from homes to cars, electrical appliances, gold, etc., as shopping centers attracted large crowds in recent days as retailers offered "sales before the value-added tax" and discounts before the start of the rise, to avoid the new tax in the country Rich oil which faces major economic difficulties.
With the new rates applied, companies expect sales to drop, from cars to cosmetics, home appliances, and more.
Saudi Arabia has been able to fund huge projects and expenditures without any taxes for decades, but the collapse in oil prices starting in 2014 forced it to change its strategy.
Austerity campaign
As of last June, the kingdom suspended a cost of living allowance that was spent for citizens, and reduced its government spending for 2020 by about 13.3 billion dollars, and 220 billion riyals (58.7 billion dollars) will be borrowed, an increase of 100 billion riyals (26.7 billion dollars) from what was planned before Corona, according to government media.
Collection of the value-added tax began in 2018, amid a persistent deficit in annual budgets after the collapse of crude oil prices, and other taxes, including additional residence fees, were imposed on foreigners.
The International Monetary Fund expected the GDP of Saudi Arabia, the world's largest oil exporter, to contract by 6.8% this year, in its worst performance since the 1980s.
At the Saudi-Emirati border, cars jammed over transport trucks for two weeks in an attempt to enter the kingdom before the new tax, and a bus driver said Tuesday, "I have been here for two days trying to finish the papers and enter."
These strict measures contravene a social norm adopted for decades, according to which citizens were blessed with tax subsidies, exemptions and prosperity, provided by the state using its large revenues from oil wealth.
High inflation and deficit
And the consultancy Capital Economics consultancy expected inflation to rise to 6% in the current July from 1.1% last May, and she said in a report, "The government ended the closure of the country last June, and there are signs that economic activity has begun to recover, but with Moreover, we expect the recovery to proceed slowly in light of the fiscal austerity measures. "
The kingdom also risks losing commercial competition to other Gulf states, including its main ally the United Arab Emirates, countries that introduced value-added tax at 5% at the same time but have so far refrained from increasing it.
Saudi Arabia does not have many options in light of the decline in oil prices. Its financial revenues have received another blow with the authorities significantly reducing the numbers of pilgrims this year from 2.5 million pilgrims last year to about a thousand only because of fears of the spread of the virus that caused the death of more than 1,600 people in the Kingdom of Among the approximately 200,000 injuries recorded, Hajj and Umrah were generating $ 12 billion annually in the state treasury.
The Saudi "Jadwa" investment group expects the deficit to rise to a record level of $ 112 billion this year.