Two of the six gulf nations—Saudi Arabia and the United Arab Emirates—have for the first time introduced Value Added Taxation (VAT) from January 1. The 5% sales tax is being levied on sales of majority of goods and services, breaking their long-standing notion as tax free countries.

With the introduction of VAT, the UAE expects the VAT income of around 12 billion dirhams in the first year. It is learnt that the International Monetary Fund had urged Gulf countries to diversify their income away from oil industry, which contributes over 90 percent revenue of the Saudi budget and 80 percent in the UAE.

Four other gulf countries— Qatar, Kuwait, Bahrain and Oman—are also gearing up to introduce the VAT system of taxation in order to increase their revenue, which are otherwise dependent on oil industry.

VAT is a tax charged on the consumption or use of goods and services levied at the point of sale. More than 180 countries in the world have VAT system of tax collection. Nepal levies 13 percent VAT on the goods and services.

With the VAT system in effect, around 500,000 Nepali migrant workers living in Saudi Arab and UAE are expected to bear its burnt. Nepalis in these countries will now have to pay five percent additional in form of VAT in their purchases, raising their cost of living in these gulf states. Experts believe the general price level will increase by 3% in Arab, however, public expect their general expenses will increase by up to 10%.

When all the gulf nations start levying VAT on the purchases, some 1.5 million Nepalis working in these countries will have to bear the impact as they will have to pay five percent extra money. However, the gulf nations have stated that they will refrain from charging income tax. This means Nepali workers in this countries do not have to pay tax to governments on their earnings.

Nepalis mostly spend their earnings on food, water, electronic appliances, beverages, clothes, cosmetic products, oil, gold and electricity. All these products and services fall under the VAT net.

In addition, the VAT has also been introduced in the rent of shops and houses operating business activities. Nepalis, operating their own businesses in UAE will have to pay 5 percent VAT on the house or shop rent. While, all Nepalis in these gulf countries are expected to suffer the burden of VAT, there is no certainty that their income or salary will increase.

According to UAE Federal Tax Authority, companies having a yearly turnover of 375,000 dirhams (100,000 US $) will have to compulsorily register their business under VAT while companies earning above 178,500 to 275,000 dirhams can opt to register under VAT.

The VAT system, however, is not applicable in school fee, hospital fee, visa fee, airlines ticket and public transportation. Furthermore, the VAT is also not applicable in the premium of medical insurance service given to the workers and life insurance. The premium on medical insurance will be borne by the concerned company.