Value-added-tax rate increases: A comparative study using difference-in-difference with an ARIMA modeling approach

Collecting and managing taxes is a critical keystone to protecting a country's financial intensity and developing a country's tax system, where value-added tax (VAT) has proven to be a nurturing and steady foundation of income for governments. VAT is a primary source of financial gain in developing nations. This study examines the influence of the new VAT on non-financial Saudi-listed companies, comparing the impact of the July 2020 increase from 5% to 15% across non-financial sectors using charts, tables, variance analysis, and an ARIMA model within a Difference-in-Differences (DiD) framework. Data cover 2019 (pre-15% VAT and pre-COVID-19) and 2020 (post-15% VAT during COVID-19). Results show that a sharp VAT increase (with other unmeasured factors) significantly affects inter-industry volatility in financial reporting metrics, intensified by COVID-19. A 10% VAT increase is associated with notable metric fluctuations, including an average profitability decrease of about −2.16%, more inactive firms, and higher bankruptcy risk, potentially raising unemployment and reducing long-run tax revenues. The findings question whether such VAT changes reflect the natural tax system in Saudi Arabia and suggest the government consider practical implications before further interventions in non-financial sectors.