Saudi Arabia and the United Arab Emirates (UAE) introduced the Value Added Tax (VAT) for the first time from Monday.
It is a five per cent tax on most goods and services to boost revenue. The VAT will be applied on food, clothes, electronics and gasoline, phone, water and electricity bills, as well as hotel reservations, the BBC reported.
Some outgoings were exempt from the tax or given a zero-tax rating, including medical treatment, financial services and public transport.
The UAE estimates that in the first year, VAT income will be around 12 billion dirhams ($3.3 billion).
“The imposition of VAT will help to raise tax revenues of the Saudi government to be utilised for infrastructure and developmental works,” said Mohammed Al-Khunaizi, a member of the Shoura (consultative ) Council.
Organisations such as the International Monetary Fund have long called for Gulf countries to diversify their sources of income away from oil reserves.
In Saudi Arabia, more than 90 per cent of budget revenues come from the oil industry while in the UAE it is roughly 80 per cent.
Both countries have already taken steps to boost government coffers.
In Saudi Arabia, this included a tax on tobacco and soft drinks as well as a cut in some subsidies offered to locals. In the UAE, road tolls were hiked and a tourism tax was introduced.
But there were no plans to introduce income tax, where most residents pay zero per cent tax on their earnings.
The other members of the Gulf Cooperation Council — Bahrain, Kuwait, Oman and Qatar — have also committed to introduce VAT, though some have delayed plans until at least 2019.0