Saudi Arabia and the United Arab Emirates are ringing in the new year with the introduction of a five percent value-added tax (VAT) on most goods and services, in an effort to boost revenue and revive their oil-dependent economies.

The tax, which goes into effect on Monday, will be imposed on a wide range of commodities, including food, clothes, fuel, entertainment, electronics, and telephone, water and electricity bills.

Rent, real estate sales, airline tickets and school fees are excluded from the scheme.

The move is part of a region-wide measure agreed upon by the six Gulf Cooperation Council (GCC) member states in Riyadh in 2016.

“The imposition of VAT will help to raise tax revenues of the Saudi government to be utilised for infrastructure and developmental works,” Mohammed Al-Khunaizi, a member of Saudi’s Shoura Council, said on Sunday.

The other GCC members – Qatar, Bahrain, Oman and Kuwait – have until January 1, 2019, to impose the tax.

Diversifying the economy

Tim Callen, the International Monetary Fund (IMF) Mission Chief for Saudi Arabia, told Al Jazeera that the introduction of the VAT is “an important step in the right direction” and “likely to be positive for investors in the longer term”.

“Government revenues in the GCC are very reliant on the proceeds from the sale of oil,” he said. “This makes them vulnerable to swings in the oil price. It is important that the GCC countries diversify their sources of government revenue to reduce this reliance.”

According to IMF estimates, the planned VAT rate in the Gulf nations will raise additional revenues of some 1.5 to 3 percent of non-oil gross domestic product, depending on the country.

Both Saudi Arabia and the UAE – like other Gulf nations – have suffered since oil prices crashed four years ago.

In June last year, on the recommendation of the IMF, Saudi Arabia and the UAE officially applied a 100 percent selective commodity tax on tobacco and energy drinks and 50 percent on soft drinks.

In addition, since last July, Saudi Arabia has levied fees on expatriates’ dependents of all nationalities. Corporate income taxes are also imposed in some Gulf nations.

However, experts say the implementation of the new value-added tax will not offer a “big boost” to the two oil-dependent nations.

“It is unlikely to impact the economies or the GDP. Both Saudi Arabia and the UAE have outward-looking economies that are not based on domestic consumerism,” Ellen Wald, author of the upcoming book Saudi, Inc. and a non-resident scholar at the Arabia Foundation, told Al Jazeera.

Jane Kinninmont, a senior research fellow at the Chatham House think-tank in London, said the effect on the overall economy would be mixed.

“VAT transfers money from consumers to the government, so it will help boost the government’s non-tax income, but may also dampen private consumption,” she said.

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