Saudi Gazette

THE first day of January 2018 was also the first day of a comprehensive system of taxation taking effect in the Kingdom for the first time ever. Since the concept is new, the government had held discussions with key stakeholders including consumers and businesses to answer the many questions they have about the new tax law.

With a view to shedding some light on the effect of VAT on the economy, consumers, and assessing the readiness of businesses, Saudi Gazette interviewed Nicholas Soverall, senior director of taxation in KPMG Saudi Arabia.

“Ordinarily when you introduce VAT, or you increase the rate of tax, there is a temporarily inflationary effect until both consumers and businesses get used to the fact that there is an extra 5% on all goods and services. This usually does not last long; people will settle down and get accustomed to this within approximately 6- 8 months,” he said.

Inflation is not generally driven by taxation. “It is normally driven by factors such as: the increase in input costs, weak exchange rates, and an imbalance between demand and supply,” he added.

The tax rate in the Kingdom is extremely low compared to other countries. “I think it was the right decision to introduce people to the tax at this very low rate so they could become accustomed to taxation. If the tax rate was higher at 8% or 10%, for example, this might have caused longer inflationary impact because of the effect on what we have to pay for goods and services,” Soverall stressed.

When asked about his thoughts that many people have said that they expect the rate to go up in the next couple of months, Soverall replied, “The rate is unlikely to increase anytime soon. However, it may increase within the next 3 or 5 years.”

He expected that amount of money to be generated from VAT in 2018 to be approximately about 1.5% of GDP (approximately SR23 billion).

Moving to another point, which is the effect of VAT on national economy, Soverall said, “Around the world, governments need money to invest in infrastructure, education, security, job creation, healthcare — the list goes on. Oil prices have dropped. This has affected the Kingdom’s GDP so, if the government did not look for other alternative sources of revenue, it would have a shortfall which would have to be funded by borrowing, adding to the cost of managing the economy. Taxation was one of the new steps implemented to maintain the country’s standard of living and to maintain good economic growth. The contribution of VAT, tax and Zakat is necessary to keep the economy moving. The majority of the Saudi population is young, they surely want jobs and to have a bright future. Taxation will ultimately benefit the nation.”

One of the initial problems is that some stores have charged more than 5%. “I think there will be mistakes in the early stages of implementing the tax. It is new to everyone including businesses. What the government does not want to see is businesses profiting and raising prices pretending to charge VAT and then not declaring it. There are harsh penalties, the General Authority for Zakat and Tax has already started some form of inspections of businesses because they want to make sure that the businesses are all registered, they are charging properly and the process is very transparent,” he said.

He continued that all consumers must know from their receipt all the details: registration number, VAT amount, etc. “As a consumer, you must understand what VAT is being charged. The government is very strict about that, the General Authority for Zakat and Tax has launched an app, so that consumers can check that price after VAT and report any violations.”

“GAZT told us that over 80% of the businesses that they expected to register have already registered. However, there are still some businesses that have not registered and these must register themselves soon. Registration is just the first step; we help clients to implement VAT and comply with the law. There are still many areas for business to attend to. VAT remains a complex tax that requires constant attention,” he added.