The implementation of value-added tax (VAT) will have the greatest fiscal benefits in Saudi Arabia and the UAE, while the current political climate will limit the benefits of the tax in other parts of the GCC, according to a new report from BMI Research.
According to the report, the introduction of VAT is “a positive step, allowing the hydrocarbon-dependent economies to further diversify revenues with relatively limited negative economic fall-out.”
While both the UAE and Saudi Arabia have already implemented VAT, BMI notes that the impact will be different in both countries.
“VAT will be a bigger boost for government revenues in the UAE, given its larger consumer base and importance of retail spending for the economy, especially from overseas visitors,” it notes.
“Moreover, with Abu Dhabi and Dubai attracted wealthy visitors, we believe that consumers will be able to absorb higher costs.”
In Saudi Arabia, BMI believes the impact of VAT will be lower, particularly given that the government has announced plans to transfer cash to the most vulnerable households to limit the negative impact of the tax.
While the report notes that “widespread unrest” is unlikely, the fact that the kingdom’s real GDP contracted by 0.5 percent in 2017 and Saudi consumers have already suffered the impact of subsidy cuts and fiscal austerity “could feed discontent.”
In the case of Bahrain, the report notes that any gains in revenue are likely to be off-set by elevated government spending.
“Elevated spending, in a bid to limit social instability, will severely cons train improvements in Bahrain's fiscal position, even as VAT is introduced,” the report notes.
Similarly, the report notes that in Kuwait and Oman – both of which have put off the implementation of VAT until at least 2019 – discontent and political gridlock could further delay the tax.
“Kuwait will see limited fall-out from the near-term failure to introduce VAT,” the report says. “The country benefits from tremendous oil reserves and financial buffers.
“As such, while the limited political willingness to implement fiscal reforms in Kuwait will limit the scope to reduce exposure to fluctuations in oil prices, long-term risks are limited.”
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