Saudi Arabia’s King Salman today ordered changes to its newly-implemented value-added tax (VAT) regime.

A royal decree was issued which states that the Saudi government will bear the VAT burden of private healthcare and education services for Saudi citizens, the General Authority of Zakat & Tax (GAZT) confirmed to Zawya by phone today, adding that it had received new directives related to the decree.

A 5 percent VAT rate was levied on private education and healthcare services in the kingdom when the tax came into effect on January 1, 2018, despite calls to exempt these two sectors.

A Saudi Shoura Council member last month called on Saudi authorities to exempt healthcare and educational services from VAT, stating that these are basic human necessities. (Read more here).

Analysts said that imposing VAT on these two sectors would compromise the competitiveness of the kingdom’s privately-owned healthcare and education businesses and could jeopardise the state's own efforts to stimulate private investment into these sectors.

Economists also argued that the VAT returns achieved in these sectors would be lower than the increased burden the tax would place on public sector services, since demand for private health and education services would weaken and shift towards the free public sector.

Saudi households’ expenditure on education reached 21.8 billion Saudi riyals ($5.8 billion) in 2017, of which 7.64 billion riyals went on tuition fees, according to the Saudi General Authority for Statistics.

In the United Arab Emirates, most products and services related to the education and healthcare sectors are subject to a zero rate of VAT. Suppliers in sectors subject to a zero rate of VAT are allowed to reclaim the VAT they pay on business costs.

The decree was announced on the official Saudi Press Agency in the early hours of Saturday morning. A second decree on VAT was also issued relating to housing, stating that the kingdom would pay the tax that a citizen would incur on the purchase of their first home  - up to a value of 850,000 Saudi riyals.

In the United Arab Emirates, the first purchase of any new residential property within three years of its construction is subject to a zero rate of VAT. Subsequent residential property sales are also exempt from VAT.

For Zawya’s Special Coverage on the introduction of VAT to the Gulf, click here.

(Reporting by Nada Al Rifai; Editing by Michael Fahy)

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