This paper examines how value-added tax (VAT) reforms affected recorded point-of-sale (POS) spending in Saudi Arabia’s restaurant, café, and food service sector during a period of rapid payment digitalization. Two policy shocks are analyzed: the introduction of a 5% VAT in January 2018 and the increase to 15% in July 2020. Using monthly official POS data from January 2016 to January 2024, the study applies an interrupted time-series framework. Baseline estimates are obtained using Generalized Least Squares (GLS) with AR (1) correction. In contrast, seasonal SARIMAX and Error Correction Model (ECM) specifications are used as robustness checks and to distinguish short-run from long-run dynamics. Controls include food and beverage price indices, headline inflation, and COVID-19 disruptions. Results show statistically significant positive level shifts in recorded POS sales after both VAT reforms, with larger measured effects after the 2020 increase. However, the evidence suggests that these changes primarily reflect formalization of transactions, migration toward electronic payments, improved reporting compliance, and intertemporal expenditure timing rather than persistent growth in real demand. Post-reform trend coefficients indicate gradual normalization in subsequent months. ECM estimates suggest that approximately 56% of short-run disequilibrium is corrected within one month. Findings are robust across alternative specifications. The paper contributes new evidence from the Gulf region by showing that retail transaction indicators may overstate real consumption responses when tax reforms coincide with rapid financial digitalization. From a sustainability perspective, the findings highlight the role of digital financial systems and modern tax administration in improving economic transparency, strengthening fiscal sustainability, enhancing formal-sector integration, and supporting the institutional transformation objectives of Saudi Vision 2030. The results imply that fiscal-policy evaluations should jointly account for tax administration reforms and changes in payment technology.
Alamri et al. (Mon,) studied this question.