Saudi triples VAT to tackle budget deficit

12 May 2020

Saudi Arabia is to triple value added tax (VAT) as it seeks to boost its economy, which has been hit by both coronavirus and low energy prices.

Finance minister Mohammed al-Jadaan added that the kingdom would also suspend its cost of living allowance to cut state spending.

Saudi Arabia first introduced VAT two years ago as part of efforts to reduce its reliance on world crude oil markets.

State news agency SPA said VAT would increase from 5% to 15% from 1 July, while the cost of living allowance will be suspended from 1 June.

The move is part of the government’s plan to save 100bn riyals – or $27bn – due to declining oil prices, a stagnating domestic economy, and “unplanned expenses” for the healthcare system during the coronavirus pandemic.

The kingdom introduced the cost of living allowance of 1,000 riyals ($267) per month to state employees in 2018 to compensate for VAT and a rise in the price of petrol.

“These measures are painful but necessary to maintain financial and economic stability over [the] medium to long term... and overcome the unprecedented coronavirus crisis with the least damage possible,” Al-Jadaan said.

The kingdom’s state spending was set to outstrip income and leave it with a $9bn budget deficit for the first quarter.

Coronavirus lockdown measures are expected to slow the pace of economic reforms such as the kingdom’s Vision 2030 programme, which aims to modernise the economy and wean it off its dependence on oil.

The kingdom has also launched a series of measures aimed at supporting the private industrial and mining sectors.

“These newly launched measures provide different layers of support towards sustaining operations within the industrial and mining sectors,” said the Ministry of Industry and Mineral Resources.

“Such measures include offering a 30% discount on electricity bills and the settlement of only 50% of it, while offering the possibility of payment deferral.”

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