According to the latest market research, Saudi Arabia’s VAT (value-added tax) will reportedly contribute around 43 percent of non-oil revenue by the end of 2021. The government hopes to raise SAR 206 billion (USD 54.9 billion) over the next five years.

Jadwa Investment reported the numbers, a Saudi closed joint-stock company, in early October of this year. The report also indicated that numbers were up from 25 percent last year and 14 percent in 2019.

Jadwa also expects “other revenues” to become an essential contributor to non-oil revenue in the medium term, fueled by state asset sales and public-private partnerships (PPP).

Finding non-oil based profit

In an ongoing move to shift the Kingdom away from an oil-based economy, the Kingdom has implemented several projects in the wake of Vision 2030, one of which was the introduction of the VAT in January of 2018 at a standard rate of 5 percent. This number was subsequently tripled in July of 2020 and still stands at 15 percent.

However, in an April interview marking the fifth anniversary of the announcement of Vision 2030, Crown Prince Mohammed bin Salman told the Liwan Al-Mudaifer Show that the current 15 percent VAT rate was a “temporary measure.” During the interview, he stated that the 15 percent rate was meant to last for a minimum of one year to a maximum of five before going back to a target between 5 and ten percent.

He also ruled out introducing an income tax, citing increasing homeownership and falling unemployment in the Kingdom as two significant achievements.

Saudi life post-tax introduction

Since its introduction, the VAT has gone on to affect the state of the Saudi economy in several ways, most notably by way of budget deficits and inflation rates.

The Kingdom reported a budget deficit of nearly SAR 41.25 billion (USD 11 billion) in the third quarter of 2020, over half its deficit from Q2 of the same year, as a spike in non-oil revenues offset a continued decline in oil income.

According to Reuters, the deficit was attributed to tax increases and pent-up consumer demand after the novel coronavirus (COVID-19) imposed lockdowns in the first half of 2020.

VAT and inflation

In July of this year, the Kingdom’s annual inflation rate rose to 6.2 percent in June, the highest this year, from 5.7 percent in May. In the same year, Reuters also reported that inflation in the Kingdom had increased by 6.1 percent in July, up from a 0.5 percent inflation rate in June. June of 2021 also marked a third consecutive monthly rise, reflecting the July 2020 increase in VAT.

However, Capital Economics stated in July that inflation was expected to start declining as the base effect of the VAT increase dropped out of the annual price comparison. They also estimated that the headline rate would slow to around 1-1.5 percent year-on-year.

The International Monetary Fund also predicted an annual average inflation rate of 3.2 percent in 2021. And in August, the annual inflation rate in the Kingdom went down to 0.3 percent, the lowest reading since December 2019.