Saudi Arabia’s Shura Council has approved the draft of value-added tax (VAT), a major step forward in levying of sales tax in the kingdom, which is at the heart of the government’s push to generate revenues through alternative sources as windfall from oil dwindles.

The council, a powerful consultative body, gave the approval after the financial committee on VAT submitted its report, according to kingdom’s official news agency SPA, which added that the draft law is in line with the provisions of the uniform agreement between the GCC countries.

The council’s approval follows the launch of a public consultation for the draft law in June by Saudi Arabia’s General Authority for Zakat & Tax (GAZT), the government body responsible for introduction and the collection of taxes in the kingdom.

The regional governments, in principal, agreed in December 2015 to start preparations for implementation at 5 per cent, in 2018 or 2019. All six countries in January 2017 signed the GCC VAT framework agreement and it was published in the kingdom of Saudi Arabia earlier this year.

Only Saudi Arabia and the UAE have so far said their VAT go-live date is 1 January 2018. The UAE has yet to finalise and announce the tax laws and the accompanying executive rules that will explain the tax and collection procedures.

International Monetary Fund (IMF) expects that the introduction of the VAT would help the Gulf States to generate tax revenues equivalent to about 1.4 per cent of their GDP, which will help offsetting the impact of squeezed revenues on the back of persistently low oil prices.

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 rate across the GCC will be 5 per cent, which is a starting point and it could be increased at a later stage, according to people who have attended government tax briefings said, adding that there could be an inverse relation between the price of oil and the percentage of VAT, going forward.

The GCC tax framework does not give procedural details and each member has to develop and enact its own tax law and executive regulations. The member states are at varying stages of readiness to herald the new tax regime.

This article has been unlocked to allow non-subscribers to sample MEED’s content for FREE. MEED provides exclusive news, data and analysis about the Middle East every day. Subscribe to MEED to have full access to Middle East business intelligence. Click here