KSA Guide: What is Impact of VAT on Food & Beverages sector in Saudi Arabia?

The present implementation of VAT in Saudi Arabia arrives with a slew of exemptions that keeps a view on its societal impact. As the Government intends to boost the nationwide economy, Vat comes with the required influx of additional finances. Although the VAT implementation does not focus on raising the cost of living, some sectors have a drastic impact.

The Government has launched VAT for two industries: packaged food and non-alcoholic beverages. There are a few food items expected to be exempt from the VAT. The categories will incur a 5% rate.

Understanding the Short-Term Impact

Concerning the short term, customers and consumers are anticipated to bear the higher costs. The VAT Implementation incurs the costs for each in a supply chain as the companies are required to adjust the accounting as well as reporting systems, reprogram internal software, train their staff, and more. In response, the companies will try to experience from other nations and transfer the final consumer’s costs.

Outlining the Long-Term Impact

The category consumption (i.e., value terms) will change over five years with regard to the 5% increase in the overall price levels. This might be the long-run response and usually is larger than the short-term effect because of the consumer habit persistence. People need to adjust to purchasing habits, and it takes time for them to undergo the change. This is mainly because of several factors, including long-run elasticity allowing for dynamic effects and economic conditions changes.

It’s the upper limit of the overall effect as retailers and producers might reduce the overall pre-tax prices. With that move, the price increase may be lower than 5%. According to VAT for Food & Beverages sector in Saudi Arabia, the extent to which retailers and producers share the tax burden depends on the competitive market for every category.