GCC governments reluctant to introduce VAT

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An Emirati man reads the front of a can of powdered milk in a supermarket in Dubai, UAE. Photo - Majalla.com

A top regional tax expert reckoned GCC governments are likely to delay plans to introduce a value-added tax (VAT) as Arab uprisings and the ongoing financial crisis will dent political support for the proposed measures and might draw public ire.

Finbarr Sexton, a tax partner at Ernst & Young in the Middle East and North Africa termed the 2015 target date ‘optimistic’ for the introduction of the tax and doubted if it would come into effect any soon.

“We have had the Arab Spring and the global financial crisis, and since then most governments are reluctant to introduce tax regulation, which impose an additional cost burden,” he said.

GCC governments have been studying the options of introducing VAT in upcoming years to widen their revenue income to pay for public services. According to UAE Ministry of Finance officials, there was a consensus to launch the scheme in 2015 to bolster public spending. However, the global financial crisis has forced many states to announce huge stimulus packages aimed at reviving their economies.

Political unrest in parts of the Middle East prompted many governments to give generous handouts to its citizens. Saudi Arabia, facing sporadic protests in its Eastern province, unveiled a combined spending package worth US$129 billion, including funds for housing loans and aid for the jobless last year.

Many critics insist VAT appears at odds with recent state-funded handouts as it is a consumption tax imposed on certain goods and services, usually consumer goods. They also point out to the fact that companies would also have to bear the burden of additional costs to implement the system amid weak economic conditions.

“The 2015 deadline was also unlikely as at least two years would be needed for a public awareness campaign about VAT and to allow firms time to prepare their IT systems,” Sexton said.

IMF Pressure

IMF has long urged GCC nations to implement the value-added tax in order to ensure a reliable inflow of government revenues, and have a shield to protect itself from volatile oil prices. While many experts believe introducing the VAT will supplement government income, they are not sure about the time frame.

“In light of the recent political and economic circumstances, it’s increasingly difficult to predict what will happen with fiscal reform in the region,” said Dean Rolfe, PwC’s Middle East tax leader. “With the absence of political will it may be pushed back in the short-term.”

“Some will focus on oil and others on financial services. One size does not fit all and they have to decide what the impact will be on their national citizens and to make sure they are still attractive as a destination for foreign direct investment,” said Sherif El Kilany, a regional tax expert at Ernst & Young.

A levy on petrol and other related products seems out of question as GCC governments heavily subsidise the products and ensure its cheap availability.

“I don’t think it would be as controversial as some people have suggested, said Giyas Gokkent, the chief economist at National Bank of Abu Dhabi. “The core commodities would likely be excluded, like food items and medicine, and if it was introduced it would likely be phased in,” he added.

Source: The National

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