The Law Firm of Hazim Al Madani Attorneys and Legal Consultants
Value Added Tax and Selective tax
Written By: Trainee Attorney DANA ALMUTAIRI
Recently, some questions and discussions have been raised on the Saudi street as well as through the audio and visual media on the decision of the Saudi Council of Ministers on 25/04/1438 H to approve the unified GCC value added tax agreement, and the unified Agreement on Selective Taxation for the GCC States.
But before discussing VAT and selective Taxation, the general concept of taxation should be clarified.
Taxation is a new concept for consumers in the Kingdom of Saudi Arabia. These two provisions will be the first of its kind in Saudi Arabia, so taxes should be defined in general so as to explain the concept of VAT and selective taxation.
Taxes, in general, can be explained as a way for governments to get revenues that help cover the costs of public services such as hospitals, schools, universities and others.
Government Vision on Value Added Tax:
Saudi Arabia decided to apply VAT at 5% by the beginning of January 2018. Value added can be explained in a simple way so that the consumer can understand it as follows: –
It is an indirect tax (because it is not directly levied by the consumer but paid in installments), imposed on a specific set of goods and services being sold and purchased and VAT is applied to companies in more than 140 countries around the world as a guaranteed source of revenue that contributing to the budgets of countries and spending on important areas such as health care, infrastructure, education, and defense. VAT is levied at every stage of the supply chain, starting from production to distribution to the final sale of a commodity or service. The value added tax is added to the final price of the product whenever an additional value is added to the product. The value of the tax is added as a percentage of the price proposed by the seller. VAT is a consumption tax, usually paid by the user or consumer who buys the product, while the tax value is supplied by the seller. VAT will be applied on all products and services except for (100) commodities that are considered as the main commodity. For example, in this concern, a report by Ernst & Young said that the value added tax to be applied to 5% in the GCC would generate revenues exceeding 25 m which will give it the opportunity to reduce the fiscal deficit and adjust taxes and other fees in addition to increasing investment in infrastructure.
Selective Taxation in the Kingdom:
On the other hand, from the recent taxation imposed and approved by Saudi Arabia is the selective tax, which has been applied by the Kingdom at the beginning of April, it is possible to explain what is the selective tax: a tax levied on goods that are harmful to public health, environment or luxury goods in varying proportions, and “The General Authority for Zakat and Income” is the body responsible for collection.
Accordingly, the selective tax will be applied initially on three items: tobacco products, energy drinks and soft drinks, which were imposed on consumers for several reasons, such as the increase in the consumption of products harmful to health, the costs incurred by individuals and the state as a result of the treatment of their damages, obligation of the Kingdom to fight Harmful goods, the claim of WHO to raise prices to reduce consumption, Saudi Arabia association with the GCC tax reform program.
This triggers our next question, who will the selective tax be imposed on?
The selective tax will be imposed on producers of selective goods within the Kingdom and importers of selective goods to the Kingdom, where there will be a penalty for tax evaders up to double the fine, suspend the activity of the company and other related to the licenses of the tax of the establishment.
The objectives of the application of selective taxation and its impact on Saudi society:
- Reduce the consumption of harmful goods.
- Pushing consumers to reduce their consumption.
- Help those who wish to quit consumption.
- Reduce or delay the start of consumption, especially for children and young people.
- Directing consumption of community members towards useful goods.
- Directing the financial resources collected from the tax to useful projects and programs.
- Reduce the cost of treatment, and compensate the state treasury for what it spends to address the environment and the affected.
As a result of the “2030 Vision” and the National Transition Program, the contribution of the non-oil sector to the Saudi economy has increased due to the fact that revenues have been affected by the decline in oil prices and the dependence on oil and gas revenues, as the imposition of such taxes will reduce the Kingdoms reliance on oil revenues only and will provide an alternative source to enhance revenues and sustainability of the financial flow of the Kingdom.
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