The two members of the Gulf Co-operation Council started charging the tax for the first time yesterday, adding a 5% levy on most goods and services.
The UAE expects to raise $3.3bn (£2.4bn) from the tax. Saudi Arabia said it plans to spend $261bn this year thanks to an increase in revenue that the VAT is expected to bring.
Goods and services which now have VAT applied to them include food, petrol and utility bills. However, financial services, public transport, domestic rent and healthcare have been exempt from the tax or given a zero-tax rating.
While this change puts an end to the tax-free living that these countries have been promoting over the years, there are no plans to introduce income tax, and the rate is still much lower than the average VAT rate of 20% in Europe.
Other Gulf countries like Bahrain, Qatar and Kuwait have also decided to introduce VAT over the next few years following several recommendations by the International Monetary Fund (IMF).
Jihad Azour, director of the IMF’s Middle East and Central Asia department, said in May, “We believe VAT is an important component of the fiscal adjustment and revenue diversification plans of GCC countries and these measure are necessary for long-term fiscal sustainability.”
The IMF said last year that GCC countries have intensified their efforts to diversify budget revenues as part of their fiscal consolidation strategies.
However, it suggested that there is “plenty of scope” to raise additional non-oil tax revenues to support their fiscal consolidation efforts, including the introduction or expansion of tax on business profits.