Value-added tax (VAT) has become a crucial revenue source for governments globally, particularly in developing nations. Saudi Arabia, aiming for economic diversification under Vision 2030, introduced a 5% VAT in 2018, raising it to 15% in 2020. This unexpected increase presents a unique opportunity to analyze the impact on businesses, especially in light of the concurrent COVID-19 pandemic. Existing research focuses on the impact of VAT implementation or a 5% VAT rate, leaving a gap in understanding the effects of a sharp increase to 15%. This study addresses this gap by investigating the effect of this significant VAT hike on the financial performance of non-financial Saudi-listed companies, examining key financial statement items across different sectors. The research question is: Does the imposition of a 15% VAT affect total assets, equity, debt, income, revenue, costs, net income, and cash flow components?

The literature review explores various aspects of VAT, including its progressivity, implementation challenges, and economic impacts. While VAT is generally considered a broad-based consumption tax, its impact on income distribution is debated. Some studies suggest it can be regressive, particularly on low-income households, while others argue it's relatively proportional or even progressive depending on factors like exemptions and lifetime income. The role of external forces, such as EU membership or IMF influence, on VAT adoption is highlighted. Prior research also examines the effects of VAT on specific sectors (e.g., banks, tourism, new energy) and macroeconomic indicators (e.g., economic efficiency, export performance). However, studies focusing on the impact of a sudden, large VAT increase like Saudi Arabia’s are limited, particularly for non-financial companies in a developing economy context. This study contributes to filling this research gap.

The study employs a comparative industry analysis and a difference-in-difference (DiD) methodology combined with an ARIMA time series model to address potential endogeneity issues. The DiD approach uses data from two periods: the second and third quarters of 2019 (before the VAT increase and COVID-19) and the third and fourth quarters of 2020 (after both). The sample includes 192 non-financial Saudi-listed companies across 11 sectors (excluding finance). Eleven key financial statement items are considered: Total Assets, Shareholders' Equity, Total Liabilities and Shareholder Equity, Total Income, Total Revenues, Total Expenses, Net Income, and various cash flow components (changes in operating, investing, and financing activities, ending cash). To account for time-dependent instability, ARIMA (p,d,q) modeling was employed, with the optimal model (ARIMA 1,1,0) selected using AIC and BIC criteria. The augmented Dickey-Fuller (ADF) test confirmed stationarity of the first-differenced data. The study uses Stata software for analysis. The DiD model includes the specified financial variables for both periods (before and after VAT increase), allowing for the estimation of the VAT’s impact, controlling for potential confounding effects.

Descriptive statistics revealed a general decline in key financial indicators after the VAT increase and the onset of the COVID-19 pandemic. A comparative analysis across industries showed varying impacts. In the energy sector, total assets, liabilities-equity, total income, and total revenue significantly decreased after the VAT increase. The materials industry experienced substantial decreases in net income and total revenue (-27%), which is attributed to decreased demand. The capital goods industry showed a substantial increase (4865%) in net income, indicating increased demand for these goods. The commercial and professional services sector experienced a general decline in most indicators, reflective of reduced demand during lockdowns. The transportation sector showed mixed results: increases in total assets but decreases in net income and cash, suggesting investments alongside operational challenges. Overall, the study found a significant negative impact on many key financial indicators across most sectors, with the combined effects of the VAT increase and the COVID-19 pandemic exacerbating the negative impact on corporate performance. The DiD analysis with ARIMA modeling further supports these findings, demonstrating the statistically significant negative impact of the VAT increase on various financial metrics. The ARIMA(1,1,0) model revealed significant autocorrelation in the data.

The findings show that the significant VAT increase negatively impacted most sectors, even though some sectors showed positive results. The counterintuitive positive outcomes in some sectors can be explained by several factors. For instance, the initial drop in consumer prices after a VAT increase may boost sales and government revenue in the long run. Also, tax cuts for companies can encourage investment and growth. However, the opposite effect—negative impacts—can arise from difficulties in fully shifting the tax burden, input VAT costs, and shifts in product demand due to changed tax proportions. The study’s results are consistent with other research showing the importance of VAT design (exemptions, rates) in affecting economic efficiency and growth. The combined effect of the VAT increase and the COVID-19 pandemic makes it challenging to isolate the VAT's impact entirely. This necessitates considering the results with an understanding of the complexity of the Saudi Arabian economic context and the global crisis. The research underlines the importance of comprehensive policy analysis and consideration of potential unintended consequences before implementing large-scale tax reforms.

This study provides crucial insights into the impact of a substantial VAT increase on non-financial companies in Saudi Arabia. It highlights the significant short-term negative effects on profitability and other key financial metrics, highlighting the need for careful consideration of economic conditions and potential unintended consequences of sudden and significant tax changes. Future research could explore the long-term effects, delve deeper into the sectoral variations, and broaden the scope to include other tax types and governance factors within developing economies. The study's limitations include the focus on a specific tax and country and the influence of confounding events like COVID-19.

The study's limitations primarily stem from the focus on a single country (Saudi Arabia) and a specific tax (VAT). The findings may not be generalizable to other countries or tax systems. The concurrent COVID-19 pandemic may have confounded the results, making it difficult to isolate the effect of the VAT increase entirely. The study's time frame is relatively short, limiting the ability to assess long-term impacts. The analysis focuses on listed companies, excluding smaller, non-listed businesses, which may exhibit different reactions to tax changes. Finally, the model's assumptions, such as linearity and constant variance, may not perfectly capture the complex relationships within the data.