Saudi Arabia, UAE to reap 'greatest' benefits of VAT: BMI

Value-added tax (VAT) will have the "greatest" fiscal benefits in Saudi Arabia, and the UAE, BMI Research said in a recent report.

The two countries introduced the 5 percent tax from Jan. 1, 2018, to diversify government revenue sources and move away from their dependence on oil income.

"We see the measure as a positive step, allowing the hydrocarbon-dependent economies to further diversify revenues with relatively limited negative economic fallout," the report said.

The introduction of VAT at the GCC level will, however, have differing impacts across the region, with challenging political climates limiting some of the benefits of the new tax.

"Gains in revenue from a new tax measure in Bahrain are likely to be largely offset by elevated spending given the challenging political environment. Similarly, in Kuwait and Oman, political gridlock and concerns about popular discontent have already caused delays to the new tariff and could further delay the tax," the report said.

While the UAE has been a first mover in the region in terms of revenue diversification, the consultancy said that Saudi Crown Prince Mohammed bin Salman's key role in socio-economic transformation plans underpins willingness to stick to the reform agenda outlined in Vision 2030.

The fiscal impact of VAT in Saudi Arabia will be lower compared to the UAE, especially as the government has introduced regulations to support low and middle-income nationals through the Citizen's Account Program, which aims to offset the impact of the Kingdom’s austerity measures.

"The low rate of the VAT, at five percent, suggests that widespread unrest is unlikely," the report said.

Meanwhile, the report said that Bahrain is likely to introduce VAT around mid-2018 while Kuwait and Oman's will delay VAT until 2019 due to the government's “limited political willingness" to introduce fiscal reforms.