Saudi Arabia’s General Authority for Zakat & Tax (GAZT), the government body responsible for introduction and the collection of taxes in the kingdom, has launched a public consultation for the draft law governing value-added tax (VAT).

The launch of the consultation comes after the GCC announced the ratification of the unified framework agreement to introduce VAT across the region, in a bid to shore up the declining finances of regional governments on the back of the slide in hydrocarbons prices.

Saudi Arabia and the UAE are the first two countries in the six-member GCC bloc to introduce VAT from 1 January 2018.

The consultation will allow members of the public and the business community to provide feedback on the kingdom’s VAT draft law before it is sent for final approval, GAZT said in a statement.

The deadline for feedback submission is 29 June, it said, adding that the accompanying by-laws will be developed and agreed in the third quarter of this year.

“The consultation is an important opportunity for the public and businesses to share feedback on the draft law for VAT,” Tareq al-Sadhan, acting director-general of GAZT, said in the statement.

“This is the first time a tax like this will be introduced in the GCC, so we are working hard to understand the needs and perspectives of business to ensure we can support them through the VAT implementation process.”

The regional governments, in principal, agreed in December 2015 to start preparations for introducing value-added tax (VAT) or sales tax, at 5 per cent, in 2018 or 2019. All six countries in January signed the GCC VAT framework agreement and it was published in Saudi Arabia earlier this month.

The IMF expects that the introduction of VAT would help regional states to generate tax revenues equivalent to about 1.4 per cent of their combined GDP, which will help offset the impact of persistently low oil prices on their revenues.

Taxation system

The GCC tax framework is similar to the taxation system in the EU and the UK, with minor differences in some sectors. VAT will apply on goods and services and imports.

The standard 5 per cent rate is a starting point and it could be increased at a later stage, people who attended government tax briefings tell MEED. They also say there could be an inverse relation between the price of oil and the percentage of VAT, going forward.

Both Saudi Arabia and the UAE are rushing to put in place the legal framework and executive rules governing VAT and other special taxes, which will be introduced before the end of this year.

The kingdom will introduce a selective tax from 10 June on products including tobacco and energy drinks, GAZT said last week, adding that it will levy a 100 per cent tax on tobacco products and energy drinks while carbonated drinks will be taxed by 50 per cent. The UAE’s Federal Tax Authority (FTA) earlier in May announced the same ratio for selective tax, which will be implemented in the fourth quarter of this year.

Although Saudi Arabia is getting ready to implement selective tax within two weeks, it has yet to announce the regulations governing it. Reports have indicated the zakat authority’s board was scheduled to meet by the end of this week to issue and announce the executive by-laws.

In the UAE, however, the tax procedures law is in the final phase and is expected to be issued and published soon. The VAT law is being debated by the technical legislative committee in preparation for submitting it to the cabinet for approval, while the selective tax draft law will soon be discussed by the committee, according to the FTA.