Saudi Arabia could introduce value-added tax (VAT) in two years as the Middle East’s biggest economy looks to beef up alternative streams of income and cut its dependence on oil sales for revenues.

The kingdom, the biggest exporter of crude in oil producers’ group Opec’s basket, is aiming for a tax rate of 5 per cent, according to UK news agency Reuters, which cited Saudi Finance Minister Ibrahim Alassaf’s interview with the local Al-Hayat newspaper.

“VAT will be introduced gradually and will be completed within two years, which is the time set for application in GCC countries in 2018. It will be about 5 per cent, which is the lowest worldwide,” Alassaf was quoted as saying.

Saudi Arabia expects a SR326bn ($87bn) budget deficit in 2016 as it embarks on spending cuts and economic reforms to compensate for shrinking oil revenues. Oil revenues in 2015 are expected to be SR444.5bn, representing 73 per cent of the kingdom’s total revenues. This is 23 per cent less than the income generated from the sale of crude during 2014.

Opec is battling with US shale producers for its share of the global oil trade. The Saudi-led price war has sent shockwaves across the six-member economic bloc of the GCC. The Gulf states, which account for about a third of the world’s proven oil reserves, rely heavily on sale of oil and are now braving softening economies and rethinking spending plans amid shrinking revenues.

Riyadh is now implementing sweeping economic changes as it seeks to diversify income streams by introducing reforms that include taxation, a review of subsidies and the limiting of public sector wages. Apart from the introduction of VAT, Saudi Arabia is considering further taxes on goods such as tobacco and soft drinks.

Younis Haji al-Khouri, undersecretary at the UAE’s Finance Ministry, told reporters in early December that the target for introducing the tax in the region was three years. The Washington-based IMF has suggested the UAE consider imposing VAT at a 5 per cent rate.