Cooked in cheap oil? ‘Tax-free’ Gulf states to introduce VAT to revitalise economy

Gulf states are planning to introduce value-added tax starting next year following the hit faced by the energy-rice countries due to a drop in oil prices.

Gulf states are planning to introduce value-added tax starting next year following the hit faced by the energy-rich countries due to a drop in oil prices.

An Economic Times report stated that the United Arab Emirates, one of the Gulf states that have been long known for being tax-free, is likely to double the price of tobacco and increase soft drink prices by 50 percent even before applying a general VAT on goods and services from January 1.

The UAE has agreed to introduce VAT at five percent next year as they seek to revitalise their economies. The other five tax-free haven states are also taking measures with plans to introduce VAT, said the report.

After a global supply glut that triggered a drop in prices in 2014, the balance sheets of companies in these economies continued to decline despite government’s implementation of measures recommended by the International Monetary Fund (IMF).

Some of these measures included freezing wages, benefits and state-funded projects, cutting subsidies and raising power and fuel prices. The government also borrowed hundreds of billions of dollars from their massive sovereign wealth resources in an attempt to curb the deficit.

Since, Saudi Arabia and the UAE make up 75 percent of the Gulf Corporation Council’s (GCC) $1.4-trillion economy and are home to 80 percent of the Gulf population, nationals and expatriates, the move to introduce VAT has received various reactions.

While some believe that VAT will be an “exciting, dramatic” change in the region, others have shown concern about the push in prices up for over 50 million residents.

Deloitte, a consultancy firm, has said that the progressive implementation of VAT from next year “marks the start of some of the most exciting, dramatic and far-reaching socio-economic changes in the region since the discovery of oil” more than half a century ago.

However, the move is expected to increase prices across the board including for nationals, who have benefited from a cradle-to-grave welfare system, said the report.

“Citizens won’t be happy about the price hikes from the VAT. I don’t think it will be acceptable as it will affect people’s budgets,” said Khaled Mohammed, a Saudi working in Dubai’s property sector.

According to the report, the move to collect taxes will hit the region’s thousands of low-income workers.

“It’s going to be tough for all those who draw small salaries,” said Rezwan Sheikh, an Indian restaurant worker in Dubai.

“We’re already struggling with finances. How much are we going to save after the VAT?” asked Sheikh, who sends most of his salary home to his parents and pregnant wife.

As per the agreement between the Gulf states, some goods and services will be exempt from the tax.

According to a US-based IHS Markit Economics, Bryan Plamondon, preferential treatment will be given to food, education, and healthcare, as well as renewable energy, water, transportation, and technology.

Plamondon estimates that VAT will raise between $7 billion (5.95 billion euros) and $21 billion (17.77 billion euros) annually — or between 0.5 percent and 1.5 percent of GDP.

The IMF has insisted that the introduction of VAT will not drive away millions of expatriates who were lured by a tax-free environment in Gulf countries. And added that the returns could reach around two percent of GDP.

However, inflation rates will also increase.

According to the Research Head at Cluttons Dubai, Faisal Durrani, inflation may double to four percent in the UAE next year.

Another agency, Capital Economics has projected Saudi’s inflation to reach 4.5 percent, a stark shift from the current 0.4 percent deflation.

The success of this move may require additional efforts. According to a leading Kuwaiti economist Jassem al-Saadun, governments will need more than numbers to ensure a successful introduction of VAT.

“People must be convinced that there is social justice, that raised funds will be used for development projects and that corruption is checked,” the head of Al-Shall Consulting told AFP.