The proposed introduction of value added tax (VAT) would help the GCC to rebalance local economies and maintain public services but could also stimulate the growth of a nascent black market, experts have warned.
There is already a thriving trade in fake luxury goods in the UAE and introducing VAT could drive other cash-based markets underground, they said.
The six Gulf states are pursuing discussions over plans to introduce VAT as a way of broadening their revenue base, with a meeting scheduled later this month.
It is thought the sharp rise in oil prices and resultant pressure on national budgets has spurred governments to revisit proposals first mooted in 2007.
A committee comprising representatives from across the GCC has proposed a levy of between 3 and 5 percent, according to Reuters, but no further detail has been announced.
Tax experts told Arabian Business that if VAT was introduced at the proposed rates it would be a positive and pragmatic move.
“In the long-term, it will be of enormous benefit as it allows for more long-term planning and the realistic achievement of strategic objectives such as rebalancing local economies,” said Bob Swarup, principal of financial advisory firm Camdor Global and author of Money Mania.
“Given the skewed and volatile nature of Gulf finances a stable set of oil-independent revenues is vital.”
Christopher Bovis, professor of International and European Business Law at Hull University Business School in the UK, said that any move to introduce VAT represents “a pragmatic view that GCC countries cannot continue to provide the level, quality and degree of public services without additional revenues.”
However, he added that the government risks fuelling the growth of an illegal black market economy if it fails to introduce clear rules on exemption and watertight policies for collecting the tax.
“Lessons should be learned from market economies with established VAT regimes to avoid creating a parallel black market based on cash transaction to avoid VAT. The system for collecting VAT needs to be integrity driven and effective.”
VAT should only be introduced on goods or services where the transactions are already captured by the government, agreed Swarup.
“A large company that files accounts is likely to be far easier to tax than a small local trader who trades mostly in cash.”
Jonathon Davidson, chairman of the British Business Group of Dubai and the Northern Emirates, said the short term impact of VAT at the proposed rates would “not be dramatic”, but if it was higher it could deter “retail tourists” that play a large part in boosting Gulf economies.
“The key is not to affect the lower income end of the demographic but to apply VAT to items where consumers can exercise a choice and do without the item if they chose to – that is, treat it as a luxury and not a necessity.”For all the latest business news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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