The impact of VAT on education



SAUDI ARABIA has been providing education to its citizens free of charge since its creation. The Kingdom's founder King Abdul Aziz and his sons who ruled the country after him wanted to provide the citizens and residents with the best education at all levels free of charge. The government also distributed monthly stipends to the students at universities, professional colleges, technical institutes and schools for special needs children in order to encourage them in their studies.

In addition, the government spent billions of riyals on foreign scholarships that enabled outstanding Saudi students to pursue higher education at reputable international universities and institutions abroad. These scholarships have been available since the 1950s. The government’s efforts to eradicate illiteracy have received plaudits as it has been supporting the adult education program for several years, benefitting a large number of people in the cities and villages.

As part of its educational campaign, the government established many universities across the Kingdom to enable young Saudi men and women to have higher education opportunities in various scientific, technological and administrative specializations. Apart from that the Kingdom allocated billions of riyals to promote vocational and technical education.

In order to ensure private sector participation in the sector, the government encouraged the establishment of several private schools, which contributed to improving educational standards in the country. Private schools have been providing education following national and international curricula. Many of them followed American, British, French, German and Italian systems.

For more than 50 years, the private sector has been supporting the government to provide quality education and we enjoy its excellent results. The credit for increasing the percentage of private schools, colleges and universities in the Kingdom’s educational system goes to the Education Ministry. The government extended soft loans to establish private educational institutions.

At present more than 640,000 students have been enrolled in the private education system and this saves the government billions of riyals annually. In the absence of private schools and universities, the government will have to accommodate all these students in its educational institutions. This will force the government to establish new schools and universities.

Private education must be encouraged as it not only contributes to improving educational standards by adopting modern systems and advanced technology but also reduces the burden on national budget. Expansion of such schools and universities will have several benefits. This is the new direction of the Education Ministry and government and I would like to emphasize that this is a positive trend that will contribute to enhancing the educational standard.

Despite all these merits and benefits, the private education sector does not receive adequate support from the government, raising worries among investors, especially after the announcement that the value added tax (VAT) will apply to the sector from January 2018. The VAT bylaw does not exempt education, although it has exempted healthcare as well as real estate rent and finance from the tax. Since education is more important than healthcare it should have been exempted from VAT.

The addition of 5 percent VAT on the cost of private education will put a big burden on citizens and residents. If we assume the tax is imposed on owners of private schools and universities, it will increase their operation costs by 5 percent, reducing their profits or increasing their losses. If we expect a profit of 5-10 percent, the tax will take away all the profits or half of it.

No businessmen will be interested to invest in the education sector if the return is less than 10 percent. Everybody knows that putting money in schools and universities is a long-term investment and the investors receive only nominal profits. If we assume that the tax will be passed to students, it means the citizens and residents have to bear an additional economic burden.

This will leave the parents with a difficult choice as they either have to bear this additional cost or withdraw their children from private schools and universities and find them admission in government institutions, which will in turn increase the pressure on the state budget. The number of students at government schools and colleges will increase, and this in turn will negatively affect the quality of education.

When I reviewed the tax systems in other countries I have observed that many of them do not impose any tax on educational institutions. The United Arab Emirates, which is a member of the Gulf Cooperation Council, has exempted education from VAT. I take this opportunity to request the authorities to exempt education from VAT and other taxes, considering its importance in the Kingdom’s development.