Four GCC states need more time on VAT, IMF official says

Qatar, Kuwait, Oman and Bahrain need more time to introduce VAT because technically and politically they are not ready for the 5 per cent levy, which was implemented in Saudi Arabia and the UAE in January, an IMF official said.

"Technically they should be able to be ready in a year and a half," Abdelhak Senhadji, deputy director of the fiscal affairs department at the IMF told The National. "Of course there is the issue of political will to introduce it."

The IMF is working with the four GCC state, which are expected to introduce VAT as part of a GCC-wide agreement struck in 2016 to implement the levy across the six-member economic bloc, Mr Senhadji said.

Arabian Gulf countries are introducing taxes to help narrow fiscal deficits that have widened since 2015 because of the oil price slump from the mid-2014 high of $115 a barrel to the trough of less than $30 a barrel in the beginning of 2016. Saudi Arabia and the UAE have been leaders in tax reforms, with the introduction of VAT this year and excise taxes on energy drinks, fizzy drinks and cigarettes last year. Bahrain introduced excise taxes in December.

“The fact is that [there was] political resistance in some countries [and] they were not ready technically to introduce VAT, so the UAE and Saudi put a lot of resources to get ready for the VAT while the other countries have not,” said Mr Senhadji.

The introduction of VAT in Bahrain will be suspended until a joint committee involving the cabinet and parliament agrees on a new structure to distribute aid to lower-income Bahrainis, Reuters reported last month.

The fund has estimated that the introduction of VAT in the region could generate new revenue of 1.5 to 3 per cent of non-oil GDP.

According to Oxford Economics, 5 per cent VAT will lift inflation by 2 to 4 per cent in Saudi Arabia and the UAE, the two largest Arab economies, but will have little impact on GDP growth, given the counter-measures taken by the authorities.

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Saudi Arabia has approved a series of bonuses for public sector employees, military personnel, pensioners, students and beneficiaries of social services for a year starting from January 1 to help mitigate the impact of VAT and energy price increases.

The IMF expects minimal impact on inflation and GDP growth as well.

“It is a transitory effect: when you introduceVAT prices will go up but then over time they will decline,” Mr Senhadji said. “It will have a small effect on GDP, but again [based on] experiences from around the world, particularly for low levels of VAT, we don’t see that as a major negative impact on growth.”

Governments in the region could introduce more taxes to help lift revenue, on top of reducing spending, he added.

Property taxes are “fair” because people who are well-off will pay more taxes, but introducing corporate taxes is more problematic.

“You can’t take your property in a suitcase and leave with it, but capital is much more mobile,” said Mr Senhajdi. “This [introducing corporate taxes] is a decision you can’t make in isolation. You have to think of what other countries are providing in terms of taxes and incentives and other incentives for attracting investments and this a world-wide issue.”

The UAE Government is considering introducing new taxes in addition to the 5 per cent VAT, but has no plans to introduce income tax for the time being, the Ministry of Finance said in December.

While introducing income tax could help boost revenue, many considerations have to be taken into account, said Mr Senhadji.

“There is scope, of course, to raise more revenue with income tax,” he said.

"The question is much more [about] what is politically feasible, what is socially advisable, [and] what economically makes sense.”