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Gulf’s upcoming VAT regime requires a holistic look
11/08/2016   Mohammad Al Asoomi - Gulf News

Following the GCC’s decision to levy value-added tax (VAT) from 2018, many questions have been raised on the feasibility of applying it on merchandise, though it is already being applied by many countries to help them provide additional resources to their budgets, support their financial positions as well as ration excessive consumption.

A GCC VAT will not exceed 5 per cent even though in some European countries it can be as high as 20 per cent.

It will contribute significantly to financial resources that would improve upon the Gulf’s current economic conditions and cut reliance on oil revenues.

Being aware of its advantages, the six states concluded a comprehensive agreement to levy VAT irrespective of future developments on oil prices. As expected, the GCC VAT will bring Dh50 billion to Dh55 billion in revenues annually, depending on the economic size of each country.

These will constitute a worthy resource to fund state budgets and cut down on deficit as a percentage of gross domestic production (GDP), which is an indicator that measures the strength of local economies. Deficits had increased notably over the past two years due to huge decline in oil revenues.



No VAT on basic commodities

As VAT will not be applied on basic commodities — including food, drinks, medicines and other necessities — it will then have limited effect on the living standards. It will support government resources and help implement some developmental projects that would create more job opportunities and increase growth rates.

It will also improve many free services provided by the government for both citizens, especially in educational and health sectors besides other infrastructure services.

Imposing VAT on luxury goods will definitely contribute to rationalising the excessive consumption of such products and affecting the trade balance due to the increase in such imports.

Technically, the application of VAT will help considerably develop accurate national accounts for the GDP economic data, which currently suffer from unstable assessments made by more than one relevant body.

The forthcoming measure, which will enter into effect 16 months from now, represents an objective necessity to set the stage for the GCC’s post-oil era. The six states have started to do so through a number of steps that will serve this developmental approach.

Consequently, the financial measures taken are not meant only to change the consumption patterns but also to change the community’s perception of consumption in general.



Rationalisation

The measures are also designed to be in line with the government approaches and teach people not to depend on subsidies, which have been around a long time.

The current circumstances required an optimal rationalisation of public subsidies. These costs weighed heavily on government budgets and required fixed and constant financial resources. It is widely known that the GCC usage rates of water and electricity are the highest in the world. So, it has become a must to rationalise them and has been made clear by the new approach.

The practical measure adopted by the GCC states should be in sync with a deep social and cultural understanding so as to complete the picture of future GCC economies that are not dependent on oil.

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