JEDDAH, 18 November 2004 — Suggestions that value added tax (VAT) might be introduced to Saudi Arabia have been met with alarm by traders in shopping malls and local shopping centers. None Arab News spoke to had even heard of the proposal, put forward by GCC Finance ministers recently.

Khan H. Zahid, chief economist and vice president of the Riyad Bank was quoted as saying, “It’s a good move.”

Traders have a very different point of view, seeing any tax on their goods as both potentially harmful and difficult to administer without computerized accounting systems and a well regulated VAT authority to collect and administer the tax.

As yet the level of VAT or the type of goods that it will apply to has not been decided. Past suggestions from the GCC indicate that harmful and luxury goods — tobacco and electronic items — could be the first targets.

VAT is a tax levied on increases in a product’s value at each stage of production and distribution. It is essentially a sales tax and is included in the final price of the goods and is ultimately paid by the consumer. The Kingdom has no dedicated infrastructure in place to administer and police the thousands of retail outlets and manufacturers that would be liable for the tax should it be implemented.

The senior sales manager at Ahmed Abdulwahed Trading Co. in Jeddah, servicing the camera and electronic goods market, had heard nothing of the proposals.

“We already pay a good deal of import tax on our goods,” he said, “But any extra tax on the sales of goods over the counter can only have a bad effect on sales.” Sales executive Sa’ad Al-Abous thought that the tax, if pitched in single figures would have only a small effect on the majority of sales.

“Our customer profile is around 25 percent Western, 30 percent Filipino and 25 percent Saudi, with the rest being a mix of nationalities,” he said. “I suspect the Saudi segment will drop away for a few months but will eventually return.”

Fawaz Ahmed, manager of a small luxury goods store was not so certain. “I think it will have a serious effect,” he said. “No one needs luxury goods — and if they are taxed, then we could suffer badly.”

Store managers with computerized accounting systems felt that the administration of any tax would be fairly easy to handle. Zakaria Zenjarly, the branch manager of the Marks and Spencers store in Tahlia Street saw no particular record keeping problems. “We use fully computerized systems,” he said, “and these tax programs are already in the system.”

Commenting on reclaiming VAT payments from government authorities, he said he could not really anticipate the ease but, “I think it will be a relatively easy process.”

Central accounting should shift the administration of VAT away from local stores and place it in the hands of departments dedicated to tax returns. “All our branches are connected to head office by our own computer systems,” said Mohammed Ridha, branch manager for Toyland in Jeddah. “Tax officials will be able to get their information from there.”

He anticipated “no problem at all in recovering overpaid tax from the government.”

An essential feature of value added tax is that it is only paid on profits. Should a business make a loss — negative profit — value added tax is returned, as no value has been added.

Many stores and small businesses in the Kingdom do not have this facility and the problems of accounting for the receipt, calculation and payment of tax will present major hurdles, especially in verifying their returns to the collection authorities.

From the experience in Europe, where VAT has been in place for many years, an immediate reaction to the imposition of the tax is the development of a very lively “black economy” dealing in cash and leaving no trail of receipts for administrators.