(KSA) to boost its Economy
Increase in VAT rate by 200%
Dr Ajay Kumar PhD
Habeebee Tax; No doubt, the government is struggling hard to promote a tax culture among citizens and businesses in order to raise revenue and achieve budgetary demands. Kautilya ( Chanakya ) was the actual king maker and man behind the successes of the great Hindu ruler, Chandragupta Maurya. The regime is still acknowledged due to the good governance during its time. “Kosha Moolo Danda”, Chanakya wrote in first chapter of Arthashastra; this means ‘revenue is the backbone of administration’. But he also said – ““Just as one plucks fruits from a garden as they ripen, so shall a king have the revenue collected as it becomes due. Just as one does not collect unripe fruits, he shall avoid taking tax that is not due because that will make the people angry and spoil the very sources of revenue,”
Now, Gulf is in crisis too. During my research, I have updated myself about the loss in Business Globally for my own work. It is deplorable and mind-boggling that only sixty days lockdown can cause such damage, whereas Middle East is a rich zone, per capita income is very high excluding migrants. They can survive this kind of lockdown, minimum 3 years and maximum five years, without any help. But, another, Surprising move by KSA (Kingdom of Saudi Arabia) to boost its Economy Increase in VAT rate by 200%. Yes, I am right 200%. It means Gulf is badly hit by COVID-19 Crisis.
When I say, Oil makes or breaks, it means a lot. Ou know what in public life – an assumption of thinking about batter car, solar and other things is easy, but batter car can’t produce the onl prestige hook of your pant – but oil by product will give you a “Button” to hook you pants, and a zip to lock your manhood. Lock-Down of Oil and Gas has impacted badl thn any other things. It will Impact on Consumers, Economy, and Businesses. COVID -19 crisis wiped out at least $ 17 trillion from stock markets globally as trade comes to a standstill and countries went into lockdown. The crisis produced economic shocks like the unprecedented decline in oil demand which led to lower oil prices and a sharp decline in oil revenue heavily affecting the world’s biggest crude exporter Kingdom of Saudi Arabia and increased the budget deficit.
KSA and Other Middle East Countries were always conducive for taxation. But this new rule has foiled that concept of being TAX haven. Further, the precautionary measures to prevent the spread of the virus led to the suspension of economic activities and non-oil revenue and economic growth. These challenges led to a decline in public revenue and exerted pressure on public finances. Kingdom of Saudi Arabia (KSA), in order to combat the crisis situation, has decided to increase the VAT rate from 5% to 15% from July 2020.
The Policy is KSA will give Impact on Consumers heavily. Inflation may go up. A two-times increase in indirect tax will affect the final consumers who will be burdened with a higher cost of all daily items of consumer needs like food products, vegetables, etc. It will further lead to an increase in the cost of a meal in restaurants, take away, ticket costs of movie theatres, salons, etc.. Cost of commercials rentals and real estate will go up. It will lead to an overall increase in the cost of living for the residents. LIFE WILL BE COSTLIER THAN EARLIER. Same is everywhere, and GULF will see such increase.
It will make an Impact on the Economy of Kingdom of Saudi Arabia. An increase in the VAT rate will increase the revenue of the Government but will lead to a sudden increase in the cost of living which will negatively affect the economy and lead to inflation in the country. Also, the increase in the VAT rate can also lead to higher chances of tax evasion and eventually loss to Government. I don’t find it healthy. But Government must have taken calculated risk, as migrants workers are exiting and locals can afford such kind of taxation. It is special kind of act of taxation can be understood like – “Honey Bee collecting Honey from each flower, not sparing the plastic one”.
But I hope it is for temporary period. Needs correction too. The burden of tax can be reduced to an extent if the government excludes certain necessary household goods or foodstuffs from the VAT, an increase in no. of transactions on which taxes is to be collected rather than a 200% increase in the tax rate. Attention should be given to protect the poorer members of society from the cost increase.
The new rule will Impact on Businesses, I will impact not heavily but badly. When I say, badly, means, I mean sentimentally. Businesses selling directly to the final customers especially in the fast-moving consumer goods and services sector would experience pressure to remain competitive and may have to absorb part or all the VAT increase so that the price of goods and services are not affected. Businesses whose goods or services are VAT exempt would experience an increase in cost as they are not able to claim input VAT incurred since their products are exempt.
The new taxation will not spare to Impact on existing ongoing business contracts in KSA. Taxpayers would also need to review existing contracts that provide for ongoing or periodic supplies of goods/service as well as the resulting system and documentation changes that should be effected internally before the effective date. Taxpayers would also need to consider the impact of the change on their business.
It will Impact on Imports with cash crunch. More cash in hand is required. VAT is to be paid in cash at the time of import of goods in the Kingdom of Saudi Arabia. Increase in tax rate will lead to Increase in cash flow in hands of government due to VAT paid in cash in advance at the time of import and claiming of VAT credit will be later at the time of filing return after 3 months however it will have a major negative impact on the cash flow of companies.
The legality of Increase in the VAT rate cannot be challenged in Middle East. Supreme Council in its 36th meeting, decided common imposition by the GCC States a VAT rate of 5%, and accordingly a “Common VAT Agreement of the states of Gulf Cooperation Council” was passed with a common tax rate of 5% amongst all GCC nations.
But still question remains – Is the increase in tax rate by KSA legally justified? Can it follow a tax rate different from other GCC nations like UAE and Bahrain who are following 5% VAT rate? Or will this lead to an increase in tax rate amongst all GCC nations including UAE. In coming days we will witness the answers to these questions;
New Tax rates and impact on Indian, keeping this in mind, it is an opportune time for tax registrants to prepare themselves for the changed VAT environment in GCC. These Vat will be targeted towards enabling clients to undertake any necessary preventive action before a surprising move from the government. But, life will be costly, business needs more cash in any case.
Article is written by Dr Ajay Kumar chairman of Fox Petroleum