VAT Implementation On Petromin Product By Saudi Arabia

Abstract

Oil prices sometimes rise and sometimes fall. Such rise and fall of the oil products have affected the oil-producing countries in both positive and negative ways. However, nowadays, the prices of petrol products are very low, which is why GCC countries, including Saudi Arabia, are facing great economic challenges. Now, these countries have decided to implement a value-added tax on the specific goods and services of their countries; petrol products are also one of those goods. Most people and analysts think that this step may be proven as the wrong step for the Saudi government because it will not only raise so many business complications but also will increase the rates of petrol in products. However, the Saudi government has decided to implement the least VAT on its petrol products, which will allow them to control the price of products and enjoy the VAT amount as well. VAT can help Saudi Arabia meet its expenditures and development projects. Also, it will help the country to improve its economy further. Now, in this study, primary data and feedback surveys from the “Petromin Express” will help to understand the impact of VAT on petrol products and the strategies of the Saudi government to control its prices.

Chapter 1

Introduction

Over the last two decades, Gulf Cooperation Council (GCC) countries have made some important changes in their economic policies, and that is because of the rising and falling oil prices in the international market. Before 2000, the oil rates were high in the international market, which is why GCC countries have been enjoying great development in almost all departments. Also, rapid growth has been observed in different activities of these countries, such as the subsidized provision of water and electricity, low taxation, and soft loans (Fasano and Wang 1-195). Saudi Arabia is also one of the GCC countries, and thus, its economy depends on oil revenues. For a long time, Saudi Arabia and other oil-producing countries have enjoyed great profits from oil revenues and thus have enjoyed a stable and strong economy. In fact, till 2014, the oil barrel was sold at $115. But now, these countries are facing a great collapse in oil prices. In 2016, the oil rate was reduced from $45 to $50 per barrel, which also left a deep impact on the Saudi economy. There is a huge difference between $115 and $50, and this collapse has left a deeply negative impact on the Saudi economy (Freeman 1-7).

Saudi Arabia is also an influential member of Opec. The members of Open highly depend on oil revenues for their domestic budget. According to the statistics of Deutsche Bank and IMF, Libya can manage its domestic budget with the price of $184 per patrol barrel, Iran $131, Algeria $131, Nigeria $123, Venezuela $118, Russia $105, Saudi Arabia $104, Iraq $101, UAE $81, Kuwait $78, and Qatar $77 per patrol barrel (Fahey; McMahon). These statistics show that Saudi Arabia can manage its domestic budget very well if the petroleum price is $104 per barrel. That is why, with a petroleum rate of $50 to $70 per barrel, Saudi Arabia is now facing great economic and domestic budgetary challenges.

When going back in history, the change in oil prices has affected many oil-producing countries, especially golf countries. Saudi Arabia is also one of those countries which have been affected by oil shocks. In the twentieth century, Saudi Arabia enjoyed a pleasant time and a strong economy due to the increase in oil rates. From 1973 to 1974, oil rates experienced a 200% increase, which caused the GDP of Saudi Arabia to increase from 53,047 to 159,276 million riyals. Then, from 1978 to 1979, oil rates again increased by 24%, due to which the GDP profit increased from 270,439 to 373,309 million riyals (Algahtani). Another shock was received in 1990 during the Iraq war, and this time, Saudi GDP went up to 13%. In the fourth shock, oil prices increased again, which caused an increase in Saudi GDP by 17%. During this duration, Saudi GDP reached 17 trillion riyals. These four shocks were good for Saudi, but after 2010, the oil rates began to decrease. In the fifth shock, oil prices faced a decrease of 38%, which caused the GDP to fall to 1,384,591 million riyals. Finally, in the fifth shock again, the oil rates fell, and rates became $40 per barrel, which highly affected the Saudi GDP and forced Saudi Arabia to think of a solution to save its economy (Algahtani 124-135).

In the first shock of the oil price, Saudi GDP increased significantly, which caused Saudi Arabia to establish its economy and become one of the world’s fastest-growing economies (Ghamdi). It not only developed its departments but also enjoyed a substantial surplus in trade due to an increase in imports and government revenues. When the Saudi government faced a fall in oil prices, it also faced deficit development in its budget, and the Saudi government drew down its foreign assets. In the start, when oil prices fell, the Saudi government managed its budget by either cutting its expenditures or increasing non-oil revenues. However, this is not the permanent solution to the problem, which is why the government thought to establish a tax system with which Saudis will be able to manage their budget in the case of a fall in oil prices (Abdelbasset 5-12).

Taxation Policy

Initially, Saudi Arabia established a liberal tax system in 1975. According to this system, all the citizens, companies, and organizations used to pay a religious tax, which is also known as Zakat. According to this tax system, companies and citizens are bound to pay 2.5% of their profit to the government as a tax. At the start, the Saudi government decided that this tax policy would be implemented only for companies in Saudi Arabia. This means that the foreign companies that invested their money in industrial projects were exempted from this tax policy and didn’t have to pay anything to the government as a tax.

The Saudi government also used another tax instrument known as customs duties. According to this tax system, the tax was applied to the imported items. However, some items were duty-free, whereas other items carried 12% duties of their total cost.

Subsidizing Policy

When the Saudi government benefits from high oil revenues, it will decide to form a subsidizing policy. According to this policy, the aim of the government was to encourage the industrialists and the companies. According to this policy, the government used to lower the prices of selected services and goods. In this way, the industrialists and companies tried to perform so well. In this way, competition in non-oil departments or non-oil revenues increases. The subsidizing policy is aimed at ensuring the stability and low prices of food products. It also aimed to achieve values and social objectives in education and health areas. With the help of this policy, the government used to help the farmers with a subsidizing budget to cover their losses (Abdelbasset).

The subsidizing policy, no doubt, proved to be good for encouraging the industrialists, but then it also showed some negative impacts on the economy of Saudi Arabia. When the government had great profit from oil revenues, it enjoyed its subsidizing policy, but later, it overutilized the resources. The subsidizing policy also caused the misuse of public services, such as telephone service, gas, electricity, fuel, and water. Finally, these expenditures created inefficiencies and instabilities in many sectors, which also affected the economy of Saudi Arabia.

Value Added Tax

After 2014, the Saudi government faced a great fall in oil prices. Saudi Government has approx $700bn reserved funds in its deep pockets, but even then, it can tolerate the oil price decrease up to $75 per barrel; now, the rate has been reduced to $50, which is an alarming condition for the Saudi Government. That is why the Saudi government has now decided to adopt a value-added tax system, which will be implemented in 2018. Value-added tax (VAT) is an indirect tax on the consumption of services and goods which are paid by the end consumer. Saudi Government has decided to apply VAT on petroleum products, food items, export items, essential medicines, and international services. However, other services and supplies, such as education sales, healthcare items, insurance, and lease of residential property, will be exempted from the value-added tax (VAT) (Dale).

Now, the question arises as to why the Saudi government has decided to implement VAT on its services and goods, especially since most countries have avoided implementing VAT on their finished products. The reason is that the oil prices are now as low as they were twelve years back, and now it has become essential for the GCC countries, including Saudi Arabia, to revise their tax policies. According to Saudi Arabia, a standard rate of 5% will be implemented as VAT on specific services and goods. This tax rate is the lowest rate as compared to the global average tax rates. The Saudi government has announced that the implementation of VAT will start in 2018.

The Saudi government and other GCC countries have implemented VAT to generate additional revenue. This revenue will help the government to rebuild its economy. However, as far as the public’s reaction is concerned, then the public is not happy with the implementation of VAT in Saudi Arabia. Because of this opposition from the public, the decision to implement VAT has been postponed so many times. Moreover, the political leaders of Saudi Arabia are also not willing to implement VAT, which has been a great hurdle for revising tax policies. However, it is assumed by the government of Saudi Arabia that VAT will be highly beneficial for them and will help them to stabilize their economic condition and meet economic challenges (Kuruvilla 2-4).

Framework of VAT

When GCC countries decided to implement VAT on their petroleum products and other goods and services, then each country had to design their framework of VAT. Saudi Arabia also adopted a GCC VAT framework, which could be proven highly beneficial. According to the adopted GCC VAT framework, Saudi will implement the standard value-added tax rate, which will be 5%. However, few products and services, such as health, education, local transport, and real estate, will be exempted from VAT. It means that VAT will not be applicable to all goods and services. Rather, education, real estate, local transport, and health departments will face zero VAT.

According to the GCC VAT framework, member states will have the right to exempt the petroleum derivatives, oil sector, and gas sector from the VAT. Similarly, each country will decide whether VAT will be implemented on food products or the products will be exempted from it. Saudi government decided that local and international transport would be free from VAT. Moreover, the export items will be exempted from VAT. Now the question arises of what will be done with the financial services of the GCC countries which have implemented VAT in their system. All the financial services, such as money dealing, securities, operation loan accounts, foreign exchange, management loan accounts, trade credit facilities, and other deposit facilities, will depend on the decision of member states. This means that member states will decide whether to implement VAT on financial services or to exempt it (France-Presse).

The VAT is specially implemented in the business, so they are required to register for value-added services purposes, but there are some limits for the registrations. For businesses that have annual revenue of more than $100,000, it will be a must for them to register for VAT purposes. Otherwise, businesses have the option to register for VAT. Now, the Saudi government has decided to implement VAT in their country since 1 January 2018, but then the question arises of which departments will face the impacts of the VAT implementation. According to the assessment, VAT will impact the finance and accounting, contracts, IT and system, supply chain, tax and compliance, legal structure, Sales and marketing, and human resources departments (Gazette).

Challenges of VAT

GCC countries, especially Saudi Arabia, have now decided to implement VAT on their services and goods, which may be advantageous and challenging for the government of Saudi Arabia. Due to the opposition of the public and the political parties, VAT has been postponed so many times, but the government has announced its practical implementation of goods and services on 1 January 2018. It is also concluded by the philosophers and analysts that VAT could be proven as an unwelcome shock to Saudi Arabia because this system is not the best solution for this government.

Although the government of Saudi Arabia is still thinking about the implementation of VAT, no precise data has been confirmed by the sources. According to the GCC VAT framework, a 5% VAT will be implemented on specific goods and services, especially on petroleum products, with which it is expected that the government will earn a good amount to stabilize its economy. Although the tax policy is not new for the country because the companies have been paying Zakat and other taxes in terms of excise duties, VAT can still be challenging for the GCC countries.

The Saudi government has estimated the benefits of VAT implementation. According to them, with the implementation of VAT on specific goods and services, Saudi’s government will earn up to $6.7bn annually, which is a huge amount that will stabilize its economy and help the development of the country (Dudley). However, with such estimates, one cannot conclude that this implementation will be highly beneficial for the government because, due to the VAT, plenty of risks and complications will be faced by companies, industries, and businesses in Saudi Arabia. VAT implementation is not a process that takes one day or one week. Rather, it is a slow process that impacts the costs, cash flow, and sales of the businesses. According to Deloitte, professional services, full implementation of VAT will take up to three years, which is a high risk for businesses.

Another challenge for the Saudi government is that people are unaware of the financial information on VAT, which may also be highly risky for the Saudi business sector. It is essential that awareness sessions be given to the companies to give them a better understanding of the VAT series. Moreover, the government will also have to update its complete IT system to manage the finances, which will also be a complicated process for the business sector and the government as well (Dudley).

Another challenge will be the development of a VAT system, which will be required by every business. This system will be responsible for paying the VAT to the government tax authorities either monthly or annually. In fact, the implementation of the VAT is not only challenging for Saudi Arabia, but it will create so many complications for all GCC countries. As said by the head of tax and cooperation services of Qatar, Richardson,

“Since VAT is a new concept to the region, businesses and tax authorities in each GCC country will have to recruit and train sufficient staff. Also, governance frameworks may also need to be reviewed and updated to incorporate policies, processes, and controls that comply with VAT legislation.” (Kemp 1)

The objective of Study:

In the last two years, oil prices have been facing great falls, which has caused Saudi Arabia to face an alarming condition for the stability of its economy. Saudi Arabia and other GCC countries have now decided that the country’s expenditures should be controlled by the implementation of a value-added tax on goods and services. The objective of this study is to evaluate how the implementation of VAT will leave either a positive or negative impact on the economy of Saudi Arabia. The study will evaluate what VAT implementation will be followed by Saudi Arabia and how much VAT percentage will be imposed on petrol products by the government of Saudi Arabia. Moreover, with the implementation of VAT, an increment is expected in the supply value cost, and thus, this may cause an increase in the prices of petrol products. Does this study aim to evaluate how the VAT will impact the supply value of petrol in products?

When the government implements VAT on goods and services, then the business sector will have to pay a huge amount to the government in terms of tax. This may be risky or disadvantageous to the business sector. In return, it is obvious that the business sector will get that loss or the expected VAT amount from the end consumers. In this way, the prices of the items may increase, and the business sector will cover its VAT. Now, this study will discover the expected increment impact on supply value and its reflection on the finished product.

Research Question:

1. What is the assumed VAT percentage that will be imposed by Saudi Arabia, and when will it be implemented?
2. What is the expected increment impact on supply Value, and how will it reflect on the finished product?
3. Will Petromin (Ultra 7 20w50) be affordable to Petromin customers as living expenses, in general, will rise after imposing VAT, or will customers shift to other cheaper Brands?

Hypothesis:

H#1 VAT implementation will cause an increase in the products’ rates.

H#2 VAT implementation will affect the petroleum industry, which will raise the rates of petroleum products.

H#3 Preventive measures will be helpful to maintain the increase in product rates after the implementation of VAT.

The significance of Study:

This study will reveal how beneficial or disadvantageous VAT implementation could be on services and goods in Saudi Arabia. The main purpose of VAT implementation is to manage the country’s expenditures with the help of received tax. Thus, this study becomes of great significance because it examines and analyses whether it will be helpful in stabilizing the economy or creating complications for the business and industrial sectors. People consider that VAT implementation may also cause an extreme rise in product rates, but in this study, I will also examine the preventive methods by the Saudi government to manage the price of items. In this way, it will be proved whether VAT will cause an increase in item rates or not. With this study, one will easily understand the outcomes of VAT implementation on services and goods by Saudi Arabia.

Rationale of Methodology

The study is qualitative, and the focus is to get the answers to the research question. Although it is difficult to consult the government authorities to get an idea about VAT implementation and its impact on the economy of Saudi Arabia, a conclusion can be drawn after conducting a survey of the petrol authorities. The participants of the survey will be either the petrol management or petrol consumers who must have an idea about the impact of VAT on the prices of petrol products and its impact on the economy of Saudi Arabia. Moreover, the participants must be from Saudi Arabia. The survey will consist of questions, the answers of which could be given either by selecting one option from the options provided with the question or by filling in the blank area of the question. In this way, the results of the survey will help to conclude how VAT implementation will impact the economy of Saudi Arabia.

Limitations and Delimitations:

The purpose of this study is to evaluate how the implementation of VAT on petrol in products may affect the prices of petrol in products. However, it is really quite difficult to analyze the impact of VAT on petrol products and its impact on the economy of Saudi Arabia. This analysis is difficult because we cannot approach any government department to understand the impact of petrol in products on the economy of Saudi Arabia. For this purpose, the better approach was to use the available internet data as primary data. Just because of these limitations in the research, the result cannot be declared as 100% authentic.

However, to gain a better understanding of VAT’s impact on petromin products’ prices and on the Saudi Arabian economy, a survey will be conducted with Petromin Express. Both management members and consumers will participate in this survey. This participation and the feedback of participants will help us to understand how VAT implementation will raise the prices of petrol products and whether it will be beneficial for the Saudi government or not.

Layout

This study consists of five chapters. The first chapter will provide the introduction of Saudi’s VAT implementation on services and goods. The second chapter is a literature review which will provide insight into the literature published about VAT implementation. This literature includes research papers, books, and peer-reviewed journals. With the help of this literature, the reader will understand how other researchers have worked to analyze the impacts of VAT implementation. The third chapter is about the methodology in which I have discussed the methodology used for this research and the way in which data is analyzed. The fourth chapter will provide the complete details of the results and findings. This chapter will provide statistical data that will make it easier to understand the impact of VAT on product prices. The fifth chapter will be the conclusion of the study, which will show how the research questions have been answered and how the results have been examined.

Summary

Gulf Cooperation Council (GCC) countries have made some important changes in their economic policies, and that is because of the rising and falling oil prices in the international market. When going back in history, the change in oil prices has affected many oil-producing countries, especially golf countries. Saudi Arabia is also one of those countries which have been affected by oil shocks. Initially, Saudi Arabia established a liberal tax system in 1975. According to this system, all the citizens, companies, and organizations used to pay a religious tax, which is also known as Zakat. According to this tax system, companies and citizens are bound to pay 2.5% of their profit to the government as a tax. After 2014, the Saudi government faced a great fall in oil prices. That is why the Saudi government has now decided to adopt a value-added tax system, which will be implemented in 2018. Value-added tax (VAT) is an indirect tax on the consumption of services and goods which are paid by the end consumer. Saudi Government has decided to apply VAT on petroleum products, food items, export items, essential medicines, and international services. Now, this study will evaluate how the implementation of VAT will leave either a positive or negative impact on the economy of Saudi Arabia.

Chapter 2

Literature Review

Every country which is a member of GCC will institute their distinct domestic legislature regarding VAT. So, the complete compliance conditions and a set of laws will be sketched in that legislature. Here, we shape an outline of the possible common VAT compliance conditions. An innate trait of the VAT is the self-evaluation feature; this means that each company which is VAT registered must file, evaluate and recount its VAT commitments and rights, in accordance with the law, in front of the tax establishments. Further conditions for VAT will require registration for VAT for all companies beyond the compulsory VAT registration limit. Recording of cyclic VAT revenues with the tax establishments (monthly or quarterly). Submitting any VAT due in a definite time and evidence keeping of all business dealings like tax statements, withdrawal transcripts, import and export history, history of merchandise or amenities delivered free of cost or allotted for reserved consumption, zero-valued or VAT relieved goods and consumptions (Dale).

The ambassadors of the affiliate countries of the Gulf Cooperation Council (GCC) set the outline of an official VAT structure through all six affiliated countries with the formal acceptance of a VAT Framework Treaty. This agreement works as the foundation of the national VAT legislature in every affiliated country by specifying some definite rules, which must be obeyed by all associates, but permitting the states to select altered VAT treaties related to some goods and services. VAT will affect a lot of businesses, but it especially affects buyers and manufacturing goods, technology, mass media and communications, commercial services, and property businesses (Deloitte).

The Valued Added Tax Framework Treaty of GCC was approved by the Shura Council of Saudi Arabia on 30th January 2017. Among six members of the GCC who formally declared the acceptance of the combined GCC VAT system, Saudi Arabia was the first affiliate to do so. Administrators of the Ministry of Finance of Saudi Arabia declared that the VAT system would be valid from 1st January 2018, and a 5% tax would be applied to specific merchandise as outlined in the GCC treaty. Finance Ministry officers in the area have activated to spread out the manuscript of the VAT framework treaty in the front-runners of important trade sectors. The GCC-affiliated states have also approved the charging of discriminating excise tariffs on tobacco along with sugar-containing drinks comprising soft drinks and energy drinks. These excise tariffs are estimated to commence in the second half of 2017. For soft drinks, the excise tax will be 50%, and for energy drinks and cigarettes, it will be 100% (Insights).

In a report, it was discussed that the draft VAT law was published by the Saudi government based on the Unified Customs Law of GCC, which delivers the main principles for the VAT regime in six countries. Several topics were discussed in detail in the draft law. However, many of the regulations about practical issues like supply time, nil-rated services or goods, and rules for VAT invoices are missing (Avalara).

A secondary tax is applied to the utilization of a lot of goods and amenities, and it is called VAT. This tax is charged by VAT-registered companies which make deliveries of merchandise and amenities in the perseverance of their trade. VAT is also charged on things imported from other countries. VAT is charged at any step in the supplied series and is gathered by the companies on behalf of Management. Finally, VAT is acquired and given by the end purchaser. Though VAT will charge a lot of merchandise and amenities hence, there are a few possible exclusions: this takes in simple food substances, important drugs, and the exportation of things and worldwide services, which are estimated to be goods having no value. Moreover, other services, such as healthcare, education, trade or rent of domestic property, and investment and indemnity, are likely to be relieved from VAT (Alshahrani).

The anticipated institution of VAT in 2018 in six affiliated countries of the Gulf Cooperation Council, which consist of UAE, Kuwait, Saudi Arabia, Qatar, Oman, and Bahrain, seems to result in low prices of oil and administrations trying to find expanded means of profit. Conferring to Euro Monitor International’s Industry Forecast Model (IFM), value-added tax will affect greatly different buyer trades, and in this way, we will observe its influence on the two largest nations of the area (Saudi Arabia and UAE) and two important businesses of Packed Food and drinks free from alcohol. It is expected that a lot of foodstuffs would be relieved from value-added tax, but Gulf Cooperation Council associates still have not approved the final contract, and the list of relieved things has not been verified yet. As a result of this study, we presume that all goods and services will increase by about a 5% rate (Marić).

VAT enthusiasm will require companies to consider all of their business developments. Whereas the Saudi Vat Act is not declared yet, Vat Act, exercise and approach are common in almost all VAT structures all over the world, with insignificant differences according to conditions of every state. Traders can initiate an evaluation of their aptitude to fulfil these common requirements at this time and bring up to date their valuations for any particular conditions of Saudi Arabia as they become known. Vat aptitude needs reconfiguration of IT systems, which may take a lot of days according to the magnitude of business and processes. Reconfiguration of the system is a long-term practice, especially for an expanded business, and thus, system promptness and analysis may take a whole year. According to this exploration, arrangements for VAT promptness must be initiated from today (KPMG).

Giesecke & Nhi designed an outline for widespread budget patterning of value-added tax structure. Our outline pattern casts a lot of complications in VAT structure as applied by tax organizations. We especially demonstrate different charges, different exclusions, and multiple amounts of recompense in goods consumers and multi-production businesses. We utilize our outline to show which one is the most complicated VAT structure in Southeast Asia: Vietnam. We observe the highly economical business and supplies of simple Vietnam’s complicated VAT structure. We limit the structure only as a fair budget program to one rate and exclusion of optional exceptions. This initiates an increase in collective benefit, on the other hand, it had unfavorable distributional outcomes. These unfavourable distributional outcomes can be easily improved on a small budget to increase the combined benefit by eliminating rice and paddy from the VAT general structure (Giesecke and Nhi).

The government of Saudi Arabia has been trying to employ value-added tax since 1st January 2018 and has started active meetings with business corporations to make them aware of VAT implementation at the start of 2018. It is expected that the Saudi Government will declare the outline of the VAT Act at the end of May 2017, and the other guidelines of value-added tax are estimated to be distributed for reference in July 2017. The VAT registration procedure will be governed by the Tax Authority’s online automatic filing system (ERAD). The Saudi Government is expected to issue the draft VAT law by the end of May 2017, and the VAT by-laws are expected to be issued for comment in July 2017. The VAT registration process will be managed by the Tax Authority’s online electronic filing system – ERAD. The companies which are working under GCC region must be active to become compatible with the GCC member states of value added tax act. It ensures that GCC trades must introduce a steady VAT effect valuation to examine the influence of VAT on all of their processes. This evaluation must deliberate the influence of VAT on the following main regions: finance and accounting, IT and arrangements, tax and compliance, the supply chain of products and services, deals, sales and marketing, legal structure, and human resources. The evaluation of effects should be used to shape a perfect strategy for the steps that should be taken to be ready for the implementation of VAT on 1^st January 2018 (Young).

The Shura Council of Saudi Arabia declared the endorsement of the Gulf Cooperation Council (GCC) value-added tax Framework Agreement on 30th January 2017. Representatives of the Saudi Arabian Ministry of Finance have revealed that the value-added tax system will be valid from 1st January 2018, and a 5 per cent tax will be applied to the merchandise and the amenities as suggested in the GCC contract. Bahrain’s Minister of Finance, H.E. Sheikh, authorized the combined GCC value-added tax Framework Agreement and confirmed the anticipation that VAT would be applied from 1st January 2018 after finishing all the legal procedures. Younis Al-Khouri, the undersecretary of the UAE Ministry of Finance, declared on 12^th February 2017, that the GCC administrators were preparing initial concurrent approval of value added tax on 1^st January 2018 as the expected operation date of VAT. These formal confirmations are in accordance with the same declarations made by administrative officers of other GCC Member States. The written version of the GCC VAT Framework is possibly accessible early, and it is already being distributed by some states in different business frontrunners in the policy-making sector of the economy. According to the explained occurrences, companies and trade must believe that value-added tax in the GCC area will be a real law from 1st January 2018. So, the companies only have ten months to make arrangements for VAT applications and confirm compliance with VAT rules in every GCC state in which they work (EY).

International Monetary Fund (IMF) approved the introduction of VAT in KSA, mentioning the termination of life across the Gulf without VAT. The decision was finalized by the Gulf Cooperation Council, comprising six states. These states include Kuwait, Bahrain, Qatar, Oman, United Arab Emirates and Saudi Arabia. It is expected that other states of the Gulf will introduce this tax by 2018. The step was taken with the support of the IMF, which recommended the imposition of revenue-enhancing measures in Gulf states. The government had already implemented taxes on fizzy drinks and tobacco. According to the official press of Saudi Arabia, a Royal Decree was prepared to increase the tax on soda as well as energy drinks and tobacco from 50% to 100%. The tax-free age was enjoyed by the residents of the area when the oil price rose worldwide. However, the price of crude oil fell by half, from $114 per barrel in 2014 to $55 in 2016. So, the main exporters of crude oil pronounced some severity measures last year. Then, main infrastructural projects were ceased, the salaries of ministers were reduced, and a wage freeze was imposed on some civil employees. The budget insufficiency was controlled by managing the budget from 98 billion dollars to 79 billion dollars from 2015 to 2016. Some extraordinary cuts were made by the state to fuel and value subsidies and balance its financial plan by 2020 (RT News).

The finance minister of Saudi Arabia, Al-Assaf, mentioned that it was not planned by the Kingdom to introduce tax at the individual level, but VAT will be introduced in 2018. The decision was finalized in Riyadh, in a conference of GCC funding ministers. It was based on a contract of the Supreme GCC Council to publicize VAT in six GCC states. The VAT tax is easier to administer than other taxes and is executed on a few commodities. Income or wealth taxes are not applied, but only VAT is introduced, as indicated by Deputy Crown Prince Mohammed bin Salman. Good returns will be created with the help of VAT, and they will be supported by citizens of the KSA. About ninety-five food items are excluded from the tax, and the tax will be valid for residents as well as citizens. Education, health, and communal services are also excluded from VAT. The introduction of VAT is considered a crucial reform for the economy of GCC states, where minimal taxes are applied with no income tax, while some toll fees, such as road taxes, are functional. According to experts, VAT should be applied regionally instead of individually to reduce smuggling and impairment to competitiveness. Analysts mentioned some advantages of VAT for GCC states (NEWS).

The implication of a value-added tax structure in UAE will not only affect the buyers but also widely influence the trade. After the declaration that the UAE will also apply VAT in the state, different concerns were raised concerning the charge of trades and readiness of suppliers for the suggested enactment date, which is 1st January 2018. Some of the company holders stated that they need more time to be familiar with the new structure of tax or to restore their financial structure and functioning system. Industrialists are now looking at the traders for merchandise and amenities they use to flourish their business, to reveal the aftereffects of VAT. It is essential to put in more workforce to simplify the tax collection, which is another problem to solve (Maceda).

Initiating the value-added tax can offer a lot of welfare to states affiliated with the Gulf Cooperation Council. Value-added tax at a rate of 5% may result in revenue of 0.8 per cent to 1.6 per cent of the gross domestic product (GDP) of every state. If VAT is applied successfully, compliance with the tax system will increase. Moreover, it will provide officers with complete data about the developments that take place in the present economy, and as a result, it can enhance clarity and simplify the enlargement of aimed economic strategies. The IMF and the World Bank suggested that the states affiliated with the Gulf Cooperation Council must collaborate with one another and fix a particular VAT ratio. There are a lot of options present for private companies to unite with governments on different VAT employment aspects, such as collecting VAT from banks and mandating other aspects (Fraihat).

Ainsworth and Alwohaibi discussed in their study that a five per cent Value Added Tax would be implemented community-wide in 2018 in six GCC states. The VAT framework was anticipated to be available until October 2016. The main observation about VAT was that it was based on Europe’s credit invoice plan and was expected to be destination-based. The Intra-Gulf transactions will be effectually zero-rated by the traders, and the purchaser’s VAT will be fixed to the destination authority. However, the directing mechanism of this deposit is still not mentioned, and it will be with the help of custom mediators, reverse charge procedure of the buyer like used in the EU or through the seller’s diminution of VAT right to the overseas reserves. The study focuses on the zero-rating implementation of VAT at intra-gulf transactions. The two main traditional approaches to shaping order for placing this rule in a community are custom-controlled and accounting-controlled strategies. However, the current strategy being followed in some states is technology-controlled. This paper vies that the VAT in Saudi Arabia VAT will get an advantage from history and will be ideally suited to demonstrate the VAT civically and how to practice real-time equipment to resolve some of the utmost problematic cross-border trade complications (Ainsworth and Alwohaibi).

According to the Saudi Gazette, the agreement for the VAT framework was published officially on 21^st April 2017, and KSA became the first GCC state to publish its VAT law draft. The draft was published in two languages, Arabic and English. An electronic form of the draft was issued by the Zakat and Tax General Authority on the website to collect the comments of the public about the draft VAT edict. The feedback submission deadline is mentioned as 29^th June 2017. A questionnaire is included in the consultation system to evaluate the effectiveness of VAT implementation for KSA businesses. As it is expected that VAT will be introduced in 2018, so many things are discussed in the draft. It includes necessities on the obligation of tax, taxable individuals, supplies of possessions and services, the abode of supply, exempted and zero-rated materials, taxable worth, imports, the deviousness of tax, process, administration, drawbacks, and fines. The executive rules will be supplemented in the draft VAT law of KSA, which has still not been issued, and they will deliver further details on the VAT handling of particular goods and business sectors (Saudi Gazette).

The states of GCC were considering certain taxes for an introduction on the community in a period of extraordinary oil prices. They were always mentioned in international surveys as low-taxation states. Until now, the main role of each country has been to provide maximum benefits to its citizens instead of extracting taxes from the residents. However, now several factors are pressuring the government to take into account the tax issue. The study focuses on the historical background of the tax issue over the past two decades. It mentioned that the issue had been considered serious due to fluctuations in oil prices. In the late 90s, international organizations started to raise the issue along with domestic organizations (MARTIN HARRISON).

The article by Keen & Lockwood investigates the bases and aftereffects of the noteworthy increase in the value-added tax (VAT), examining what has made its acceptance and especially whether it has demonstrated a particularly real form of tax policy. At first, it was revealed that a tax improvement, for example, the initiation of a VAT, decreases the minimal rate of community assets, which might be directed towards improving management to enhance the tax rate. This indicates the valuation, in a board of 143 states for 25 years, of a method explaining both the chance of VAT acceptance and the profit impression of the VAT. The outcomes lead to a gorgeous number of causes of VAT acceptance and an important but intricate influence on profit rate. The evaluation proposes uncertainty that a large number of countries that implement VAT have added an operational tax mechanism in this way, yet this is less evident in sub-Saharan Africa (Keen and Lockwood).

Karen, in a report, mentioned that a bill was passed by the parliament of Bahrain in 2009 about imposing a tax on large-scale projects in the state by overseas investors. However, the notice was revised, eliminating the GCC and local investors in contradiction to the rules of the “World Trade Organization.” IMF recommended the implementation of the bill in 2009 in Oman as its implementation was delayed by adjoining countries. Oman was commended by the IMF for contrivance and scrutinising the outlays and welfare of executing VAT. Then the finance mentor of “UAE Prime Minister” suggested 2012 as the deadline for implementation of VAT in GCC states. Enormous pressure was faced by the governments of Oman and UAE from the IMF for the implementation of VAT (Karen).

Tanzi, in his study, mentioned that the agreement was made in several aspects by the GCC commissions to develop a synchronized structure of excises and VAT. As main of the customs income is lost due to FTAs, so to replace this loss a 5% VAT will be quite attractive for the government. It can be implemented by following the EU’s experience to prevent any fraud. However, the final decision is still pending, and ministers were asked to research the effects of the tax in different situations and sectors. There could be chances of several constraints due to weak administration and how the resources will get distributed in states like the UAE. The study focuses on the background of restructurings required for VAT and design issues, along with the assessments based on available data (Tanzi).

It is normal to explain profit entitlement for small industry programs by restraining business size. This article records the outcomes of the value-added tax verge in Japan, concentrating on the invitation of an expanded business to “masquerade” as a lot of small companies by individually combining business sectors. A difference in the company size supplies before and after the VAT institution of 1989 indicates a grouping of companies under the verge, an example which is recognizable in the developmental responses. To overcome the confusing outcomes of the modifications in the company features over the years, we implement a partial parametric mass disintegration method. This analysis submits that the impersonating actions by companies might be normal in other conditions (Anji).

The effect of the reduction in tariff charges and the introduction of a varied tax system on the budget of Saudi Arabia was discussed in this report. An assessable broad equilibrium model founded on a collective accounting matrix for 2000 was established for this analysis. According to the results, the welfare effects of the introduction of different tax systems will be minimal, along with the fluctuations in real absorption. If there is a need to increase the resources for investing in human capital or infrastructure, then the government should reduce the household intake initially. Without the introduction of VAT or any other taxes, the outcomes could be more fruitful if other falsifications are removed. The economic policy should focus on specifically designed schemes for the proper use of revenue generated by the increase in oil prices (Chemingui).

VAT is a value-added tax implemented at each phase of production and is not accumulated in cash registers. It is liked by the people as a proper way of financing governments of bigger countries. It is also liked as it has caused destruction to the economy as related to income tax. The revenue generated from VAT can be used to simplify tax and social safety reforms. It is also believed that VAT can reduce trade deficits. On the other hand, it is disliked by many as it helps expand government size in some cases (Daniel Mitchell).

Chapter 3

Methodology

This study is conducted to analyze how VAT implementation will affect the price of petrol products in Saudi Arabia. For this purpose, this paper includes the breakdown of the primary data available on the internet via books, journal articles, and other peer-reviewed sources. For this study, the pattern will be both the meta-analysis and the feedback survey. For this meta-analysis, many internet articles, books, and other sources were selected to understand the implementation of VAT and its impact on the Saudi economy. However, I selected a few of them to understand the future prediction about the prices of petrol in future products.

One of the steps in my research was to get approval for my survey. By getting the format of the application, I started to work on my consent form. I needed to make sure that participants were aware that all their rights were protected. They also have to know that this survey is anonymous, so they do not worry that their information can be revealed to anyone. Participants have to be older than eighteen years old. If any of the participants have any questions for my advisor or me, our contact information is available, too.

Firstly, I made sure that participants of my survey were either from petrol in management or petrol in customers and that they belonged to Saudi Arabia. The reason for that is that only the petrol management or the customers can have an idea about the impact of VAT on petroleum product prices. Another question was about the age. The purpose of this question is to know that the participants are older than 18 years because younger than 18 are not mature enough to understand the impact of VAT on petroleum prices. Another important question is what the participants think about the VAT implementation and whether it’s a good action taken by the Saudi government or not.

The major purpose of the study is to understand the impact of VAT on the prices of petroleum products, so the next question was to know what participants think about the increase in prices of petroleum products and the impact of VAT on them. This question will help to get the answer to our first research question, which is how much VAT implementation is responsible for the increase in the price of petrol products. The final question was whether people were satisfied with the preventive measures taken by the Saudi government to control the increasing rates of petroleum products. This question will help to find an answer to the third research question.

When I was creating my survey, my main goal was not to make it too long. The more specific it is, the better answers I will get. When people get tired of doing a survey, they do not finish it, or they just answer, not thinking just to finish faster. This part was challenging for me because, originally, I had around fifty questions. Going through this process, I have learned how to concentrate specifically on my topic and emphasize only the questions that have a direct correlation with my topic.

Then, the part that took a lot of time for me to understand was how to formulate questions so that a participant had a clear understanding of what I was asking. Also, just in case the question was not that specific, I added a parenthesis next to it to specify what I was talking about. For example, when I had a question, I said,” What do you think about VAT implementation? Is it a good step by the Saudi government?” The first question that arises is: what is VAT? To avoid such questions, I selected participants from petromin management and consumers. The main focus of the company was a petromin company named “Petromin Express.” The company is situated in Riyadh.

Data Analysis

The best way to analyze my survey results is by using STATA (Data Analysis and Statistical Software for Professionals) because having more than 100 participants will make it harder to use Excel to organize my data. First, I need to make sure that people have finished taking their survey, and I will get rid of participants who are missing some information. Based on my results, I would build graphs and come up with conclusions. The most exciting part for me is that I did not find anyone doing the same research that I am doing, which means that I will be the first one to discover something different and new.

Data and Descriptive:

The intended population of this research belongs to petromin management or consumers of the Saudi Arabia. This includes both male and female participants. The purpose of my survey was to learn more about the relationship between the VAT implementation and the increase in prices of petroleum products. The information obtained was not recorded in a manner that human subjects could be identified. A convenience sample was used, and the survey link was posted on different online sites, such as Facebook and Instagram.

Our sample includes 30 participants, 15 from the management and 15 from petromin consumers. However, we received data from 120 participants originally by cleaning up the data (some questions were skipped, the wrong information was entered, or participants left the survey before even evaluating any information).

Research Philosophy

With the literature analysis and the gathering of survey results, there will be enough data to conclude anything. However, it is essential that the appropriate data be gathered and analyzed so that there won’t be any distractions or wrong results. That is why it is essential that only recently published literature should be analyzed. Moreover, the selected literature is about the VAT implementation on petrolmin products by Saudi Arabia and its impact on the economy of Saudi Arabia because, in this way, it will be easier to evaluate how VAT implementation will impact the economic condition of Saudi Arabia. Also, different participants filled out the survey sheet, but some of them either did not provide complete information or provided false information. That is why the survey results were also filtered, and only those results were included in the findings, which were authentic and completely filled. In this way, the research will provide authentic information about the VAT percentage implementation on petrol in products, its impact on the petrol in products, and its impact on the economy of Saudi Arabia.

Theoretical Framework:

Saudi Arabia has been facing ups and downs in oil prices. Now, in the last few years, the prices of crude oil and petrol in products have been reduced, which is an alarming condition for Saudi Arabia because its economy depends on petrol in products. However, Saudi Arabia and all GCC countries have now decided to implement a value-added tax on all petrol products. That is why the VAT implementation and its impact on Saudi Arabia’s economy is the major focus of researchers. Cetin et al. (2014) also presented their study, in which they discussed how the VAT implementation of the products has an impact on the financial conditions of the countries. On the basis of their searching, this study will evaluate how the VAT implementation leaves its impact on the financial conditions of Saudi Arabia. Luc (2015) also presented his study, in which he discussed the effects of increases in value-added tax. He showed that the VAT implementation can never be harmful or can no way leave a negative impact on low-income households. Rather, it has a very positive impact on the country’s economy. Now, this study will also evaluate how much VAT percentage will be applied to Saudi Arabia’s petrol products and how it will affect the economic condition of Saudi Arabia.

Chapter 4

Findings

The purpose of this study is to evaluate the impact of VAT implementation on the services and goods of GCC countries, with a focus on its impact on Saudi Arabia. In the last two years, oil prices have been facing great falls, which has caused Saudi Arabia to face an alarming condition for the stability of its economy. Saudi Arabia and other GCC countries have now decided that the country’s expenditures should be controlled by the implementation of a value-added tax on goods and services. The Saudi government has decided that 5% of the total cost paid by end consumers will be implemented as VAT to the services and goods.

At the present time, the average rate of petroleum products is $45-$50 per barrel. If Saudi Arabia applies 5% VAT, then the price details will be as shown in Table 1.

Table 1 Rates of Petroleum Products per Barrel after Implementation of VAT.

The detailed calculation of the petroleum rate per barrel is shown in Table 1. The table shows that the rate of the barrel will increase from $48 to $59.85. In the table, there are three columns. The first column shows the petroleum industry’s purchase of raw materials, and the second column shows the addition of manufacturing costs, whereas the third column shows the purchase of retailers. This means that when the raw material is purchased by the industry, they pay $48 per barrel, but after paying VAT to the government and adding taxes, the price per barrel is raised to $60.

In the first column, $48 shows the purchasing of the raw material, but then 5% VAT is applied to it, which becomes $2.4 per barrel, which raises its cost to $50.4 per barrel. This means that $2.4 is paid to the government of Saudi Arabia. In the second step, when manufacturing cost is included, the cost becomes $51.4 per barrel, and 5% VAT of this price becomes $2.57 per barrel. The total cost becomes $53.97 per barrel. In this step, the tax paid to the government is (51.4-48) × 5%= $0.17 per barrel. Finally, the product is sold to the retailers at the price of $57 per barrel for which they pay a tax of $2.85 per barrel which raises the price of petroleum to the $59.85 per barrel. The retailers have to pay the tax (2.85-2.57) = $0.28 per barrel to the government. Finally, the finished product is sold at the rate of $60 to the consumer.

These details show that the total tax paid to the government is (2.4 + 0.17 + 0.28) = $2.75 per barrel. This shows that for every sale of $60 per barrel, the government earns $2.75 VAT per barrel, which may be used for the expenditures of the Saudi government and the development of the country. This increase in price is expected in 2018, and it is expected that with the passage of time, the price will increase, which will be a challenging condition for retailers and consumers. It is expected that the price will increase day by day. According to the survey results from the Petromin management of “Petromin Express,” the expected increase in the rates of petroleum products is shown in the graph below;

This means that the price of petroleum will continuously increase and will reach $84 per barrel in 2030. This shows that, in actuality, with the VAT implementation, the prices of petroleum products will regain their previous rates. If we compare the expected increase in the petroleum rate with the previous changes in the rates of petroleum products from 1970, then the results are shown in the graph below;

The graph clearly indicates that the prices increased from $1 per barrel and reached $84 in 2010, and then the rates decreased and became $50 in 2015, but now, with the implementation of VAT on petroleum products, it is expected that the oil rates will regain their rate of $84 per barrel till 2030. This will be highly beneficial for the Saudi government because, in this way, they will be able to use the received tax income for the development and expenditure of the country.

The study failed to get any information regarding Saudi’s plan B to deal with the increasing prices of petroleum products. However, the Saudi government and other GCC countries have decided to implement just 5% VAT on petroleum services, with which there will be no excess increase in petrol products. However, according to the GCC framework of value-added tax implementation, there are some limits to VAT.

According to the limitations of VAT, the VAT implementation must not cause an excess increase in the price of petrol in products. There must be a balance between the tax implementation. This means that the rate of supply must increase with a normal margin after the implementation of the tax, and thus, the rates of the products will not increase rapidly. Moreover, the tax and supply of petrol in products must rely on the demand, and both demand and supply + tax must remain balanced because they will manage the Saudi government’s petrol revenue. Otherwise, if the tax increases rapidly, then the revenue from petrol products will be reduced, and then VAT will become insufficient for the Saudi government.

The reason for the limitations is that if the prices of the goods increase, then the market purchase will decrease, and thus, the quality of traded goods or petrol in products will also be affected. When the prices are high, then the consumers become unable to purchase good quality products, and thus, the companies which provide low-quality products can get benefits.

When the VAT is implemented, the tax rate affects the price of the product, and thus, the price increases. The only solution to this problem is to manage VAT in a way that the prices do not exceed the limit. Also, according to the deadweight loss, if the prices of the products become higher, then this will affect the income of the economy, and thus, the tax money will become sufficient for the government.

Chapter 5

Conclusion

Before 2000, the oil rates were high in the international market, which is why GCC countries have been enjoying great development in almost all departments. Also, rapid growth has been observed in different activities of these countries, such as the subsidized provision of water and electricity, low taxation, and soft loans (Fasano and Wang 1-195). For a long time, Saudi Arabia and other oil-producing countries have enjoyed great profits from oil revenues and thus have enjoyed a stable and strong economy. In fact, till 2014, the oil barrel was sold at $115. But now, these countries are facing a great collapse in oil prices. In 2016, the oil rate was reduced from $45 to $50 per barrel, which also left a deep impact on the Saudi economy (Freeman 1-7).

Saudi Arabia has been facing different shocks in oil prices, which have affected its economy. In the first shock of the oil price, Saudi GDP increased significantly, which caused Saudi Arabia to establish its economy and become one of the world’s fastest-growing economies (Ghamdi). At the same time, the fifth shock of the oil price left a very negative impact on Saudi’s GDP. In the start, when oil prices fell, the Saudi government managed its budget by either cutting its expenditures or increasing non-oil revenues. However, this is not the permanent solution to the problem, which is why the government thought to establish a tax system with which Saudis will be able to manage their budget in the case of a fall in oil prices (Abdelbasset 5-12).

The Saudi government has now decided to adopt a value-added tax system, which will be implemented in 2018. Value-added tax (VAT) is an indirect tax on the consumption of services and goods which are paid by the end consumer. Saudi Government has decided to apply VAT on petroleum products, food items, export items, essential medicines, and international services. However, other services and supplies, such as education sales, healthcare items, insurance, and lease of residential property, will be exempted from the value-added tax (VAT) (Dale).

The Saudi government and other GCC countries have implemented VAT to generate additional revenue. This revenue will help the government to rebuild its economy. According to the adopted GCC VAT framework, Saudi will implement the standard value-added tax rate, which will be 5%. However, few products and services, such as health, education, local transport, and real estate, will be exempted from VAT. It means that VAT will not be applicable to all goods and services. Rather, education, real estate, local transport, and health departments will face zero VAT.

Due to the opposition of the public and the political parties, VAT has been postponed so many times, but the government has announced its practical implementation of goods and services on 1 January 2018. It is also concluded by the philosophers and analysts that VAT could be proven as an unwelcome shock to Saudi Arabia because this system is not the best solution for this government. Due to the VAT, companies, industries, and businesses in Saudi Arabia face plenty of risks and complications. VAT implementation is not a process that takes one day or one week. Rather, it is a slow process that impacts the costs, cash flow, and sales of the businesses. Another challenge for the Saudi government is that people are unaware of the financial information on VAT, which may also be highly risky for the Saudi business sector. It is essential that awareness sessions be given to the companies to give them a better understanding of the VAT series (Dudley).

This study is about the VAT implementation of the services and goods of GCC countries, where the focus is its impact on Saudi Arabia. However, VAT implementation will also increase the supplied value of petroleum products. To calculate the estimated increase in petromin products, I made a survey with the promin management and consumers of “Petromin Express.” The sample consisted of 30 participants. According to the results of the survey, it is expected that the price of petrol products will increase from $45 to $60 in 2018 and to $85 in 2030.

The study could not answer the second question however the Saudi government has decided to just implement 5% VAT on the petromin products due to which the prices will not increase to higher rates. Thus, there will be no issues with the high rates of petrol in products. From this study, it can easily be concluded that VAT implementation on the products will, no doubt, increase the rates of petrol in products, but with the implementation of 5% VAT, the prices of petrol in products will be under control. In this way, the government will also be able to use the VAT amount to develop the country and stabilize its economy.

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