Limited taxation is one of the Gulf’s chief attractions and GCC residents have been fortunate to have made it into the 21st century without being subjected to value-added tax (VAT). But the need to generate revenues is growing ever more pressing, forcing regional governments to consider the previously unpalatable option of introducing the tax.

Despite generally flush state coffers, some Gulf states are facing a stark fiscal challenge. The Washington-based IMF has estimated that Dubai government-related entities will need to repay about $9.4bn of maturing bonds and syndicated loans in 2013, and – even more painful – $31bn in 2014.

“Dubai’s government will need to repay about $9.4bn of maturing bonds and syndicated loans in 2013”

IMF

Though VAT is unlikely to be levied at the European average of 21 per cent, even a lower level of about 5 per cent could prove useful in helping broaden GCC government revenue bases. For those that are parties to free trade – the GCC-EU free trade agreement will affect all Gulf states – the need to compensate for the ensuing loss of tariff income provides an added impetus to introduce VAT.

All GCC states have made an effort to get their administrative processes in preparation for the introduction of VAT. Indeed, before the financial crisis struck, anticipation was rife that VAT could have been rolled out as early as 2013.

Such ambitions have been dashed, however. There is little appetite from the bloc’s political leaders to impose a new form of taxation on their citizens in the current climate, even if VAT would be relatively straightforward to implement and would yield a stable flow of income, with the addition of providing useful information about how Gulf economies are evolving.

The time will soon come when one of the Gulf states will have to take the initiative and introduce VAT. This will not be easy, but there seems no viable alternative to preparing the region’s people for the inevitable.