Saudi Arabia, the oil-rich nation, has seen its income drop as the impact of the pandemic has forced down global energy prices. Due to major drop in oil revenues Saudi Arabia has made a decision to increase VAT from 5% to 15% as of 1 July. Based on experts opinion, the VAT increase will probably lead to price inflation in the country in the short-term and reduction of spending on luxury items. The VAT rate increase would increase cash flow costs in the short-term, and increase operating costs. In the long-term, businesses may need to reconsider their structure, contracts and transaction flows to mitigate the impact of the rate increase.
The kingdom first introduced VAT two years ago as part of efforts to cut its reliance on world crude oil markets. Before the COVID-19 crisis, the International Monetary Fund (IMF) had advised Saudi Arabia to increase its VAT rate to 10 per cent. Measures are necessary for Saudi Arabia that it can maintain financial and economic stability over medium to long term.
The UAE has, for now, said here are no plans to hike VAT and match the Saudi move.