VAT and its effect on the GCC economies

Implementation of Value Added Tax (VAT) in the oil-rich GCC countries marks a cornerstone in the region’s unified agenda of diversifying government revenues. Mounting fiscal pressures which were triggered by falling oil prices since 2014, have catapulted this agenda by putting into force reforms that will help restore fiscal balance. The effects of VAT as one of the fiscal consolidation measures, is expected to be largely positive for all stakeholders of the economy; governments, businesses and consumers.

All GCC countries plan to introduce a 5% VAT in 2018, Kingdom of Saudi Arabia and United Arab Emirates have taken the lead by announcing that the VAT will come into effect on 1 January 2018. According to IMF estimates, a 5% VAT can potentially raise additional revenues by 1.2 to 2.1% of GDP for all the six countries in the region. In the case of UAE, the first year of VAT implementation is expected to generate approximately AED 10bn to AED 12bn revenues (Grant Thorton paper 2016). Moreover, a successful implementation will help increase transparency and endorse GCC government’s commitment towards expanding its non-oil revenue base.

IMF recognises that each GCC member state may face different challenges in its efforts to implement the VAT by 2018. Most pressing is the cost of enhancing administrative capacity requiring substantial investments in establishing a supportive legal framework, technological infrastructure to support the VAT registration system and human resource.

Businesses are being urged by governments to gear up and stream line their operations to allow for a smooth transition into the VAT era. According to Grant Thorton, it can take businesses from three months up to one year to prepare for VAT.  How this tax will impact businesses in GCC, is still being debated. It is expected that the immediate impact of the tax will be to increase operational costs of businesses, with larger firms having the ability to absorb such costs more quickly. As in the case of governments, businesses too will have to incur costs on enhancing their IT systems, and recruitment of specialist personnel and staff trainings. Businesses will also need to ensure that their legal contracts are VAT compliant. To what extent businesses would want to pass on the tax to consumers, will largely depend on the price elasticity of their product (Deloitte).

The price of goods and services for consumers is expected to witness a slight increase, albeit a one time rise (SAMA). However, it is widely being debated whether this hike is going to be inflationary or even deflationary. With basic food items and healthcare expected to be exempted from VAT, lower income consumers/households may not be affected by the introduction of the tax. Moreover, with improved non-oil tax revenues, GCC governments will be able to ensure smooth and continued provision of public goods and services.

6 thoughts on “VAT and its effect on the GCC economies

  1. Organisations will likewise need to guarantee that their lawful contracts are VAT agreeable. What exactly degree organisations would need to pass on the duty to buyers, will to a great extent rely upon the value versatility of their items, But not to worry, As Al Masha Capital advisory will guide you!

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  2. The concept of VAT clearly means that the Inflation will Directly hit the Middle class. The rich and the poor Remain unaffected, while the middle class Gets hit directly. This, According to me will create a bigger barrier between the rich and the poor. I believe VAT should be paid considering your income in mind. The higher the income, the more you pay as VAT since you have more to give, Helping the poor and creating a smaller barrier between the various classes in our society.

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  3. The introduction of tax reforms has long been discussed in the GCC. In early 1990s, representatives from GCC nations conducted a feasibility study on the proposal to implement corporate taxes and VAT to support local economies. As a result Oman implemented a corporate tax in 1994, although some sectors were later exempted.

    The idea was discussed further in various meetings and conferences, but talks fizzled out during the global economic recession in 2008 and Arab Spring in 2011. With the recent drop in oil prices, there is an emerging interest in the proposal.

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  4. The Bahraini back undersecretary was making careful effort to bring up that “the expense won’t influence people with low or center salaries”.

    The Bahrain question and answer session was prominent for some different snippets of data.

    To start with, the back undersecretary affirmed that “five GCC nations, including Bahrain, have marked the [GCC UAVAT]”. Straightforward math would show, hence, that one signatory is as yet anticipated. It is not known which GCC country still can’t seem to sign. Given the conspicuous part that the UAE has taken all through the exchanges, it is probably not going to be the UAE.

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  5. Associations will similarly need to ensure that their legal contracts are VAT pleasant. What precisely degree associations would need to pass on the obligation to purchasers, will, all things considered, depend upon the esteem adaptability of their things, But not to stress, As Al Masha Capital counseling will control you.believe VAT ought to be paid considering your salary at the top of the priority list. The higher the salary, the more you pay as VAT since you have more to give, Helping poor people and making a littler hindrance between the different classes in our general public.

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  6. The IMF said in the report that the OPEC assention will hurt makers over the Gulf this year, and veil “the normal pickup in non-oil development. In the United Arab Emirates, development will tumble to 1.5 percent this year from 2.7 percent in 2016, the IMF stated, before bouncing back to 4.4 percent one year from now. The loan specialist had estimate development at 2.5 percent during the current year in October.

    Kuwait’s economy is currently anticipated that would recoil by 0.2 percent in 2017, contrasted and the IMF’s October conjecture for a 2.6 percent extension. Development will bounce back to 3.5 percent one year.

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