Bahrain Mirror (Exclusive): Citizens in Bahrain are getting ready for the first direct tax on goods and services, after the government obtained a formal approval from parliament to apply the value added tax (VAT) starting next year.

In January 2018, Saudi Arabia and UAE were the first Gulf States to apply the value added tax to goods and services provided by any commercial institution whose annual revenues exceed 100,000 dinars (USD 377.8 thousand). What happened in these two countries after the VAT?

Saudi Arabia's annual inflation rate rose to 3% in the same month, while annual inflation in the UAE jumped to 4.8%, recording its highest level since 2015, from 2.7 % in December.

The Saudi Statistical Agency, according to Reuters, changed the base year of the consumer price index to 2013 instead of 2007 and adjusted the goods and services, making direct comparison with the previous month difficult, but Reuters said it is clear that the new tax and increase in gasoline prices have raised consumer prices significantly.

Apart from the analytical numbers, traders and consumers in both countries received this historical and unprecedented step as a blatant mismanagement of their finances in presence of the chaos in markets since the first day, leading in some cases to popular campaigns to boycott the products of some large companies after raising their prices.

The chaos experienced in the Saudi markets, small shops, and even grocery shops led to issuing hundreds of violation reports. Meanwhile, government authorities received thousands of complaints since the early days, according to official reports.

Consumer complaints in Saudi Arabia focused on price manipulation, as prices of some goods doubled, and increased 5% from the official prices. The increase on some goods and services varied between 50 to 100%.

Extortion and exploitation even reached "morning coffees", as some shops raised the old price and then added the tax.

The problem of setting new prices affected all goods. Some grocers adjusted prices, while others ignored doing this, which confused the consumers.

Some shops promoted to pay the buyer's tax, but raised their prices up to 10%.

The Saudi state announced that it will bear the value added tax for citizens benefiting from private health services, and exempted the buyer of the first house from the tax.

However, communications, private education, oil and its derivatives, domestic transport, sale and leasing of commercial property, import of gold and silver, insurance services, commissions and foodstuffs are all subjected to tax in Saudi Arabia.

The government imposed large fines on tax evasion or on failure to comply with approved procedures.

Saudi Arabia had raised energy prices by 126% and electricity by 260%, at the same time of applying VAT.

In July, taxes led Almarai company, the largest dairy company in Saudi Arabia and the Gulf, to raise its product prices by a rate ranging between 20% and 28%, after the increase in production costs.

Almarai's decision irritated Saudis on social media networks, prompting some of them to call for boycotting the company's products as it is "making big profits".

Saudis reacted with the dairy company's decision and posted more than 50,000 tweets under hashtag # Increase_in_Dairy_Products_Prices, which was number one on the list of most widely circulated hashtags within hours. Activists also launched a new hashtag #Be_Conscious_Boycott_Al-Marai.

In the UAE, the gold market suffered a significant slowdown since the introduction of the value added tax, which caused prices to rise so people were reluctant to buy. This led the Cabinet to issue a decision exempting the gold and diamond sector from any tax including VAT.

It is known that purchasing power in both countries exceeds that in Bahrain, not to mention the intensity of competition in the small Bahraini market and the increased dominance of foreigners. Which companies will be affected by the first upcoming boycott campaigns in parallel with the value added tax?

Arabic Version