Finance Minister Mohammed Al-Jadaan said the cost of living allowance would be suspended from June 1, and VAT would be increased to 15% from 5% from July 1.
Saudi Arabia's benchmark index dropped 1.2%, with Al Rajhi Bank falling 1.5% and National Commercial Bank, the country's largest lender, losing 2.4%.
State-owned oil giant Saudi Aramco was also down 0.8% ahead of its first-quarter earnings announcement on Tuesday.
In Dubai, the index fell 1%, driven by losses in financial shares. Shariah compliant lender Dubai Islamic Bank ended down 2.3%, while Emirates NBD Bank lost 0.9%.
The Abu Dhabi index closed flat. Aquaculture firm International Holding jumped 9.2%, whereas Abu Dhabi Commercial Bank declined 2%. The lender reported an 84% fall in first-quarter net profit last week as it took $292 million in impairments on debt exposure to troubled hospital operator NMC Health and payments group Finablr.
Meanwhile, the United Arab Emirates was not currently planning to follow Saudi Arabia by raising its VAT rate from 5%, the finance ministry said on Monday.
Qatar's index fell 0.5%, hurt by a 7% slide in United Development.
Egypt's blue-chip index added 0.4%, with tobacco monopoly Eastern Company climbing 6.3%.