VAT tripled from 5% to 15%: Saudi Arabia’s response to the 2020 oil and Covid shock

Stated objective

according to the Minister of Finance (May 2020)

Main measures

• The standard VAT rate rises from 5% to 15% of the value of the supply or import (article 2 of the VAT law, as amended by Royal Order No. A/638).[3]
• Zero-rated supplies (exports of goods and services, international transport, qualifying medicines and medical equipment, investment metals) and exempt supplies are not affected by the new rate.[4]
• Shelf and menu prices must show the final price including VAT; passing the increase on to customers is a commercial decision of the seller, but the tax due on retail sales is always 15/115 of the amount paid.[4]
• Transitional rule: a supply made from 1 July 2020 is taxed at 15% even if invoiced or paid earlier, except for supplies invoiced before 11 May 2020, within the invoiced amount, and actually made before the end of 30 June 2021.[4]
• Contracts concluded before 11 May 2020 between VAT-registered parties entitled to full input tax deduction, and contracts with government bodies concluded before that date, may stay at 5% until their expiry, renewal or 30 June 2021, whichever comes first.[4]
• The monthly cost-of-living allowance paid to state employees since 2018 is discontinued from June 2020, in the same package as the VAT increase.[1][13]
• The same package cancels, extends or postpones some operational and capital spending of government agencies and reduces provisions for Vision Realization Programs and major projects for 2020; a ministerial committee is set up to review the financial benefits paid to staff not covered by the Civil Service Law.[1]

Timeline

1. February 2017

   Saudi Arabia ratifies the unified GCC VAT agreement[5]

   Ratified in February 2017 (Jumada al-Awwal 1438 AH), according to the tax authority.

2. January 1, 2018

   VAT introduced at a standard rate of 5%[5][3][13]

   The VAT law, issued by Royal Decree No. M/113 of 2 Dhu al-Qadah 1438 AH, applies from 1 January 2018. The same year, the King ordered a monthly cost-of-living allowance of 1,000 riyals for state employees.

3. May 11, 2020Announced

   The Minister of Finance announces VAT at 15% from July 2020[1]

   Statement carried by the Saudi Press Agency: the cost-of-living allowance is discontinued as of June 2020 and VAT rises from 5% to 15% as of July 2020.

4. May 11, 2020

   Package of about 100 billion riyals announced, including VAT at 15%[1][2]

   The same day, the tax authority confirms the 1 July 2020 date and asks the public to report any business that raises prices for VAT before that date (call centre 19993).

5. June 2020

   Cost-of-living allowance discontinued[1][14]

   According to press reports, about 1.5 million state employees received the 1,000-riyal monthly allowance.

6. June 7, 2020Adopted

   Royal Order No. A/638 (15 Shawwal 1441 AH) amends article 2 of the VAT law[3][5]

   The consolidated law published by the tax authority dates the order 15/10/1441 AH (7 June 2020 in the Gregorian calendar); the authority’s VAT page links the order to the 11 May 2020 announcement.

7. July 1, 2020In force

   VAT at 15% applies to all goods and services subject to the standard rate[4][5][2]

   Zero-rated and exempt supplies are not affected. Transitional rules kept the 5% rate on some contracts until 30 June 2021 at the latest.

8. July 1, 2020

   VAT at 15% takes effect[2][5]

9. August 2020

   GASTAT: annual inflation reaches 6.1% in July 2020, then 6.2% in August[7]

   The statistics authority attributes an overall influence on consumer prices to the VAT increase, while noting lower petrol prices partly offset it.

10. October 4, 2020

    Real estate supplies transferring ownership exempted from VAT[4]

    From 4 October 2020, supplies of real estate transferring ownership are exempt from VAT, under amendments to paragraph 1 of article 30 of the implementing regulation.

11. April 27, 2021

    The Crown Prince calls the 15% rate temporary[12](secondary source)

    In a television interview marking five years of Vision 2030, he said the measure would last a minimum of one year and a maximum of five, with a target of 5 to 10%, and ruled out an income tax.

12. June 30, 2021

    End of the transitional rules for contracts signed before 11 May 2020[4]

13. July 2021

    GASTAT: the VAT effect drops out of annual inflation (0.4% in July 2021)[9]

14. August 2022

    IMF recommends maintaining the current VAT rate[11]

    Conclusion of the 2022 Article IV consultation; the IMF attributes part of the improvement in the 2021 fiscal balance to the full-year effect of the tripling of the VAT rate.

The debate

Citoyen takes no position: arguments are reported as their authors put them.

Indicators to watch

• Consumer price inflation · GASTAT · IMFSee the card →
• General government budget balance · IMFSee the card →
• Real GDP growth · IMFSee the card →
• Revenue from taxes on goods and services in the state budget · Ministry of Financeno Citoyen card yet
• Standard VAT rate (announcements on a return to 5-10%) · ZATCAno Citoyen card yet

Sources

1. [1]Saudi Ministry of Finance: additional measures to confront the financial and economic impact of the Coronavirus Pandemic –Saudi Press Agency (SPA), May 11, 2020
2. [2]GAZT: VAT of 15% Goes into Effect in July, 2020 –Saudi Press Agency (SPA), May 11, 2020
3. [3]نظام ضريبة القيمة المضافة (الصادر بموجب المرسوم الملكي رقم م/113 والمعدل بموجب المرسوم الملكي رقم م/52 والأمر الملكي رقم أ/638) –هيئة الزكاة والضريبة والجمارك (Zakat, Tax and Customs Authority, ZATCA)
4. [4]الدليل الإرشادي الخاص بتعديل نسبة ضريبة القيمة المضافة الأساسية إلى 15% –هيئة الزكاة والضريبة والجمارك (Zakat, Tax and Customs Authority, ZATCA), February 2023
5. [5]عن ضريبة القيمة المضافة –هيئة الزكاة والضريبة والجمارك (Zakat, Tax and Customs Authority, ZATCA)
6. [6]Consumer Price Index June 2020: Inflation further eases to 0.5% in June 2020 –General Authority for Statistics (GASTAT), July 2020
7. [7]Consumer Price Index August 2020: Consumer Prices up 6.2% in August 2020 –General Authority for Statistics (GASTAT), September 2020
8. [8]Annual Average Consumer Price Index 2020: Inflation at 3.4% in 2020 –General Authority for Statistics (GASTAT), 2021
9. [9]Consumer Price Index July 2021: Consumer Prices increase by 0.4% in July 2021 as VAT effect fades out –General Authority for Statistics (GASTAT), August 2021
10. [10]IMF Executive Board Concludes 2021 Article IV Consultation with Saudi Arabia (Press Release No. 21/210) –International Monetary Fund, July 8, 2021
11. [11]IMF Executive Board Concludes 2022 Article IV Consultation with Saudi Arabia (Press Release No. 22/286) –International Monetary Fund, August 2022
12. [12]No plans for income tax, VAT increase is temporary: Saudi Crown Prince Mohammed bin Salman –Arab News, April 28, 2021 · secondary source
13. [13]Saudi Arabia to impose ‘painful’ austerity measures, triple VAT –Al Jazeera (news agencies), May 11, 2020 · secondary source
14. [14]Coronavirus: Saudi Arabia to triple VAT and suspend cost of living allowance –Middle East Eye, May 11, 2020 · secondary source
15. [15]Saudi Arabia Hikes Its VAT, But for How Long? –Arab Gulf States Institute in Washington (AGSI), July 2, 2020 · secondary source
16. [16]Saudi Arabia: Austerity In Hard Times –Global Finance Magazine, July 28, 2020 · secondary source