News Analysis: How Saudi 15% VAT hikes will affect econometrics of Hajj

By Ibrahim Muhammed

Here we are: In my analysis, I had predicted in my last analysis that Coronavirus will affect the structure of Hajj and further urged relevant stakeholders to be ready to evolve a new template for Hajj and Umrah operations.

Now, the Kingdom of Saudi Arabia had announced on Monday that it would cut spending by SR100 billion ($26.6 billion), raise triple value-added tax to 15% from July 1, and suspend distribution of the cost of living allowance from June 1. The enormous cut to spending will be achieved through cancelling and postponing some projects, while also reducing spending on major projects and Vision 2030 goals.

Al-Jadaan said that the tripling of VAT, a tax that is added onto the cost of goods in shops, will rise from 5% to 15% from July 1. He further stressed that the increase “is something that will help this year, but will help more next year and the year after as we get out of the COVID-19 crisis.”

My initial prediction is predicated on the statement made by Saudi Arabia Finance minister when he said ‘Saudi will take painful but necessary decisions’ with an open-ended statement of “all options are open”.

The first option is the 15% Value Added Tax as we await the second option.

The raising of value-added tax from 5% to 15 is an equivalent of raising the price of consumables by 100%. The General Authority of Zakat and Tax (GAZT) has said that the rise in the value-added tax (VAT) from 5% to 15% will affect all goods and services but warned against any increment in the cost of goods and services before the commencement date of July 1, 2020.

Imagine a triple increase in the costs of goods and services in the Kingdom of Saudi Arabia – the Holy land where hajj and Umrah take place. Apart from airfare, about 90% of Hajj services are provided by Saudi based hajj service providers. Accommodation, feeding, transportation and tents services. Again, 80% of Hajj fare in dollar components is determined by the trends of Saudi Arabia economics factors. Cost of Pilgrims accommodation, cost of transportation, and cost of personal purchases and Tents services.

When the Kingdom introduces 5% VAT, the effects were felt in virtually all transactions in the Kingdom. A commodity that used to cost 10 Saudi Riyals went up to Sr15. The Local restaurants in the Kingdom alter the price of their foods to align with the 5% VAT, Shops were made to display the cost of their items and the amount added as Value Added Tax. With the 15% increase, the food or commodity that hitherto cost 10SR will now be within the range of 20-35 Saudi Riyals.

My fear is that the Tourism sector in Saudi Arabia will be kept in the deep fridge if the 15% VAT covers hotels, transportations and consumables as witnessed when the 5% VAT was introduced. Though, Saudi Arabia ratified the Gulf Cooperation Council (GCC) Value Added Tax Framework Agreement (the “Framework Agreement”) by virtue of Royal Decree No. M/51 in 2017.

The Value Added Tax Framework Agreement stated that “Companies with an annual revenue in excess of SAR. 375,000 shall be under an obligation to register for TVA VAT purposes”,  Clearly, companies that registered under Saudi Ministry of Hajj and Umrah to offer service to hajj or Umrah pilgrims surely has annual revenue in excess of SAR. 375,000. If this is the case, we should expect hike in their services

Aside from the above, the Saudi Arabia budget relies heavily on oil revenues, as the oil prices plummeted it affected public revenues and led to a high budget deficit. According to first-quarter data of 2020, the deficit has reached to 34.1 billion riyals ($9.1 billion).

Financial analysts believe that “Saudi authorities may increase the Hajj and Umrah fees to help reduce the severity of the country’s budget deficit.

According to official figures, pilgrimages bring revenue of $12 billion to the Saudi kingdom every year. Hajj and Umrah contribute to 20% of the non-oil GDP and around 7% of the total GDP.

If that agreement is extended to the 15% VAT increase then Hajj and Umrah industry will be affected because hotels, utility bills and virtually all goods and services will be directly hit. If the hajj goes tough, only the tough will go to hajj. Ya Allah, make this easy for us.

Moreover, 15% value-added tax effects is expected to be passed forward fully because the legislation usually clearly assumes that this will happen and because, as a service charge tax, there is likely to be a general awareness on the part of traders and hajj services that all will be affected.

Sometimes traders will take advantage of the confusion to raise prices “exorbitantly” and even to levy VAT when they are not liable (for example, local Taxi transport in Saudi Arabia).

If Hajj 2020 did not hold, the Umrah industry will be the first beneficiary and victim of the 15% Value added Tax. A Beneficiary because, those who could not perform hajj and are desirous of having the feeling of spiritual purification of the soul will pay for Umrah enmass. They will also be the first set of tour operators to feel the cost of high services. If hajj did not take place, Saudi Arabia will definitely lift the suspension Umrah immediately after the hajj season – possibly by ending of July.

Once again and as I was saying, the negative effect of coronavirus on hajj and umrah industry has started to manifest and it seems the travel industry is being taken into the intensive unit. We need to think outside the box.

*Muhammed, National Coordinator, Independent Hajj Reporters.