'This has been put off for the next three-five years, partly because it puts pressure on public opinion,' says a source close to Majlis thinking. 'It will now return to the drawing board and is likely to re-emerge within the framework of a comprehensive tax regime incorporating both income tax and VAT [value-added tax)'.

The proposals entailed a tax rate of 10 per cent to be levied on expatriates earning more than SR 3,000 ($800) a month. Many expatriates had vociferously complained about the proposed tax, arguing that the kingdom would endure a skill exodus if their expendable income was reduced. Many companies would also have been put under heavy pressure to increase the salaries paid to their most valued expatriate staff commensurate to the tax increase.

Introducing government taxation is a major step for the kingdom, although local companies pay zakat, loosely defined as 2.5 per cent of wealth. The policy is part of the overarching programme of economic reform being pushed by the Supreme Economic Council. Taxation on companies' and individuals' income and VAT have been proposed as new measures to increase the government's non-oil revenue.

'My view is that Saudi Arabia needs the broad-based taxation of a rapidly growing private sector,' says Brad Bourland, chief economist at Saudi American Bank (Samba). 'However, this needs to follow an aggressive campaign of economic liberalisation and privatisation to stimulate private sector growth.'

However, income tax on foreigners has other repercussions. The kingdom's bid for accession to the WTO, although seemingly stalled, is still a key goal for many Saudi policymakers, not least in the Majlis. A bill that appeared to discriminate against foreign labour would be unfavourably viewed by many of the kingdom's potential trade partners.

The focus on expatriates has other effects too. 'To some extent, this was seen as a way to accelerate the Saudisation programme,' says Bourland. 'It would appear that the Majlis has wisely decided that labour policy is not best addressed through taxation policy.'

The rejection of the bill also represents something of a watershed for the Majlis itself. Although the body remains strictly consultative, it has nonetheless grown in size and influence in recent years. In summer 2001, the body was expanded by 30 per cent to 120 members, who are drawn from a variety of backgrounds and professions.

The rejection of this bill, while not legally binding on the government, is expected to highlight the growing role of the Majlis in the kingdom's legislative process. Analysts say this is the first time the body has rejected a bill of this magnitude - a fact that has not escaped the local press, which has hailed the decision as a step towards further representation in government.