Saudi Arabia to roll out 'sin tax' on tobacco, energy drinks

On Sunday—halfway into the holy month of Ramadan—Saudi Arabia will introduce a “sin tax” on the consumption of several products that are deemed harmful to health, including cigarettes, and energy drinks.

The kingdom will levy a 100 per cent tax on tobacco products and energy drinks while a 50 percent tax will be applied on carbonated soft drinks. This selective tax is a precursor to the broader Value Added Tax (VAT) system that is scheduled to be rolled out early next year.

Although the Government will be generating revenue from this new tax, the main purpose behind it is to address health policy concerns and discourage their consumption due to the higher prices for the end-user.

“Whereas excise tax seeks to discourage consumption and charge for its indirect costs, VAT is a revenue raising measure that has minimal consumption impacts due to its wider application,” David Stevens, VAT Implementation Partner at EY Middle East told Argaam.

“The GCC have agreed to impose both of these types of Indirect taxes as uniform revenue measures,” he added.

The United Arab Emirates is expected to implement a similar tax rate later this year.

“The selective tax will have an impact on the consumption price, as the tax value is expected to be passed forward to the final consumers,” Nadine Bassil, PwC Director, Indirect Tax, told Argaam.

Even before the implementation, soft drink and energy drink companies in Saudi Arabia are reportedly  looking at ways to offset the impact of the levy by reducing can sizes.

In Saudi Arabia, the tax will be collected by the General Authority of Zakat & Tax.

The kingdom expects to generate nearly SAR 8-10 billion in annual revenue, according to Khalid Khurais, director of the selective tax unit at the GAZT.

The selective tax will be paid by those who produce or import any of the commodities subject to this tax, local manufacturers, and tax warehouse keepers.

Taxpayers are required to file tax returns every two months and pay within 15 days from the submission date.

The authorities have warned of fines between 5 and 25 percent of the tax values on evaders, and on those who fail or delay to register or tax declarations.

Such companies could face license withdrawal and even closure, the authorities have warned.

“The implementation requirements are relatively straightforward, and with the right systems in place, the persons liable to pay the selective tax will be able to comply smoothly with the Government requirements,” Bassil added.

Write to Brinda Darasha at brinda.d@argaamplus.com