The value-added tax (VAT) being introduced in Gulf countries is expected to contribute positively on the economy and boost financial stability, with the levied money productively invested to launch new developmental projects, say officials and experts.
Experts including the International Monetary Fund (IMF) have urged the GCC to implement reforms to increase government revenues amid growing challenges on the back of lower oil prices.
The introduction of VAT will allow for increased diversification of the economy from its excessive reliance on oil.
The rate will be around 5 per cent as agreed between the six countries early this year. The UAE was one of the first countries to announce that it will go ahead with the implementation at 5 percent starting January 2018.
Businesses and government departments related to this levy have time to prepare for this in a year’s time by way of proper accounting and efficient collection.
Although it will be introduced only in 2018, business groups and trade bodies are already gearing up by organizing seminars and workshops on the impact of the implementation and the appropriate responses in preparation for its application. These discussions also center around the mechanism of calculating the VAT, and its impact on stock markets among other issues.
Tom Rogers, ICAEW Economic Advisor, and Associate Director of Oxford Economics’ Macroeconomic Consultancy for Europe, Middle East and Africa (EMEA), said recently in Riyadh: “The need to significantly increase non-oil government revenues to maintain financial steadiness is clear. But few tax policies are free of wider economic consequences, so it will be important for governments to ensure that tax policies are considered as part of broader economic diversification strategies, such as those in Saudi Arabia’s Vision 2030.”
Rogers was speaking at an event on November 22 at the release of ‘The report Economic Insight: Middle East Q4 2016’ – produced by Oxford Economics, ICAEW’s partner and economic forecaster –in a joint briefing session conducted by the accountancy and finance body ICAEW and the Saudi Organization for Certified Public Accountants (SOCPA) in Riyadh.
Regarding the GCC-wide VAT of 5 percent, IMF estimates suggest this could raise GDP as much as 1.5 percent to 2 percent across the region.
While this presents a start to addressing deficits, it also contributes to a rise in cost of living, which in turn could raise wage demands and thereby undermine organizations’ competitiveness.
Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa and South Asia (MEASA), said: “Businesses in the GCC need to brace themselves for a long-term effort by governments to close fiscal deficits and raise much more substantial revenues from the non-oil economy… To ensure that the adjustment in public finances is consistent with ongoing growth, businesses should make the case for accompanying measures that will allow tax increases to be absorbed with minimal impact on activity.”
Last week, Rashid Al Blooshi, CEO of Abu Dhabi Securities Exchange, ADX, said: “The proposed five percent VAT will be applied to consumption and not on savings or investments. It will not have a significant impact on businesses and financial markets,” said Rashid Al Blooshi, CEO of Abu Dhabi Securities Exchange, ADX.
“We’re talking about nearly Dh12 billion [in government revenues] that will be gained from the implementation of VAT, and this Dh12 billion will be reinvested into the UAE’s infrastructure,” he said.
The categories that will be exempted from VAT will be foodstuffs and goods for education and health care.
VAT, according to the global audit firm PricewaterhouseCoopers (PwC), is seen as an effective tool in raising revenue to achieve government objectives whilst preserving the neutrality for businesses. If designed and operated correctly and efficiently it can provide significant revenues with limited administrative costs and impact on business.
VAT is a tax on consumption and is levied on the price charged to the customer. Therefore, it is expected that prices will increase by the amount of VAT. However, it is ultimately a matter for suppliers to determine the price of their goods and services.
Businesses will need to amend systems, processes and procedures and will need to ensure they comply with the new requirements, recommends PwC. Businesses can start preparing by understanding how it impacts the business and operational model and assess the capability of existing systems to cater for VAT . They should also identify a VAT implementation strategy and create a project team to manage implementation