Saudi Arabia realized that relying on oil reserves as the primary income source may stop the nation from achieving considerable economic growth due to the instability of the world oil market prices and the uncertainties. Thus, the year 2018 first witnessed the implementation of Value Added Tax (VAT) in KSA.

Nonetheless, amidst continuous criticism from younger generations and the global health crises, KSA took another significant decision. In the present days, it has increased the VAT rate up to 15%, which was previously 5%. The increase in the VAT rate would have a drastic impact on the consumption behavior in the primary, secondary, and tertiary sectors of the economy. Here, let’s see how VAT in Saudi Arabia would have an impact on the tertiary sector of the economy.

Which Industries Cover The Service Sector in Saudi Arabia?

In general, the service sector or tertiary sector happens to be the third tier in the 3-sector economy. Rather than product production, the sector produces services, repairs, training, maintenance or consulting.

Take examples of tours, housekeeping, teaching, nursing, etc. In contrast, employees working in the manufacturing or industrial sectors produce tangible goods, including clothes, cars, or other equipment. As the service sector is classified as the third sector of the economy, it’s for the most significant portion of the economic business activity worldwide.

How Is VAT Applicable in The Service Sector in Saudi Arabia?

The VAT for Services sector in Saudi Arabia is applicable in all industries that get covered under the service sector of the economy. With that said, a 15% VAT rate will be added to the services, including housekeeping, nursing, educational assistance, and more. The following pointers will give a better understanding:

• The VAT rate for financial services in KSA is based on the services: taxable, margin-based service, exempt
• All life insurance is taxable
• Services related to food are always taxable
• Specialized consultative treatment and care are taxable (including nursing)
• Real estate, including residential real estate and other real estates, are taxable
• Other services like local transport, institutional education or other types of education, tourism, and housekeeping are taxable

Services offered by health providers and public education in Saudi Arabia are not expected to be subject to VAT because Government entities may not be carrying on the business for the VAT purpose (in many cases).

Besides its tertiary sector, the nation has also implemented an increase in the VAT rate in other sectors too. The COVID-19 crisis has produced economic shocks. The unprecedented decline in the oil demand has also led to reduced oil prices, and a drop in the oil revenue affected KSA.

Additionally, the precautionary measures to stop the spread of the virus contributed to the suspension of the economic activities, growth, and non-oil revenue. These crucial challenges led the Government to impose such laws in VAT in KSA.