Saudi Arabia forced to introduce taxes as oil revenues plummet

Saudi Arabia residents have long enjoyed a tax-free existence supplemented by heavy subsidies on some products. With the steep decline in oil prices and revenues this is all changing.

Last June, the Saudi government agreed with the six-member Gulf Cooperation Council(GCC) to levy a 5 percent tax on certain goods. The GCC countries have already agreed to implement selective taxes on tobacco, and soft and energy drinks this year. The decline in oil revenue has led the Saudis to attempt to broaden its investment base so that it will rely less on oil revenue in the future.

The Saudi government is also trying to cut back on expenditures. It has frozen several major building projects and imposed a wage freeze on civil servants. Even cabinet ministers' salaries were cut. The government also cut fuel and utilities subsidies. Last year there was a record $97 billion deficit. The kingdom aims to balance its budget by 2020. The official Saudi Press agency said that the cabinet "had decided to approve the unified agreement for value-added tax" that would be implemented throughout the Gulf Cooperation Council (GCC) and that a royal decree had been prepared. The International Monetary Fund (IMF) had urged the GCC countries to adopt revenue-raising measures that included excise and value-added taxes as a means of helping them to adjust to low oil prices.

The value-added tax on tobacco and its products will be a whopping 100 percent according to an article in Al Arabiya. Dr Mohammed Yamani, who chairs an NGO that helps smokers quit smoking said that the tax should reduce the number of smokers saying: “The move is a positive and important step toward combating the unhealthy habit." 14 percent of Saudi teenagers and 7 percent of Saudi women smoke. Yamani said the tax on tobacco and products would be imposed in the second quarter of 2017. The same level of taxation is to be imposed on sodas and energy drinks.

There has been talk of taxes on remittances of expats to their home countries but so far no action has been taken. A sharp decline of oil revenue has taken place as the price of oil more than halved from over $114 dollars a barrel in 2014 to a little over $55 dollars a barrel now.