Using vat effect on the kingdom of Saudi Arabia’s government revenue to predict the effect of vat on Kuwait’s government revenue

Abstract EN

This study aims to explore the effect of value-added tax (VAT) implementation on Kuwait government's budget deficit.

To achieve this aim, the effect of VAT on the revenue of the Kingdom of Saudi Arabia's (KSA's) government was chosen as an example, due to its economy's close similarity to that of Kuwait and its earlier introduction of VAT.

Ordinary least squares (OLS) regression was used to identify the effect of a 5% VAT rate on the revenue of KSA's government.

The study analyzes the effects of oil prices, oil production, and VAT on the revenue of KSA's government, using time series data from 1980 to 2019, except 1990–1991.

The OLS model analysis showed a strong and statistically significant relationship between government revenue and oil prices.

A USD 1 increase in oil price could potentially raise government revenue by 9.3 billion Saudi Arabian riyals (SAR) (USD 2.5 billion).

Furthermore, the analysis showed a statistically significant relationship between government revenue and oil production, wherein an increase in oil production by 1 million barrels annually has shown to raise government revenue by SAR 76 million (USD 20 million).

In addition, it showed a statistically significant relationship between government revenue and the introduction of a 5% VAT rate in 2018 that raised government revenue by SAR 127.7 billion (USD 34 billion).

In terms of percentage, VAT has contributed to a 14% increase in KSA's government revenue.

Based on the results, it is predicted that the introduction of VAT in Kuwait will contribute USD 7.46 billion to government revenue, equivalent to approximately 63% of the country's budget deficit.

Increasing the VAT rate to 15% could both cover the whole deficit and add more revenue to Kuwait's reserves.

In KSA, the increase in the 15% VAT rate came into effect in July 2020, which resulted in increased revenue for the country's government.