Prospect of sales tax revived

12 May 2015

Draft agreement is progress, but no guarantee of action

As lower oil prices look set to continue for years, GCC governments once again cast around for alternative sources of revenue.

Public revenues in the region are highly dependent on hydrocarbon exports, and oil prices are now below the IMF’s breakeven prices for the majority of GCC countries.

Although income tax would meet too strong opposition, indirect taxes are back on the agenda. Plans for a GCC-wide value added tax (VAT) or sales tax have been revived.

But the draft agreement which came out of a GCC economic meeting in Doha is by no means a final, binding document.

No schedule has been set out for implementation, which will need to be coordinated across the GCC to avoid the creation of a black market.

Like plans for a single currency and visa system, VAT plans could take years to put into practice, or never materialise at all. VAT in the GCC was first mooted in the 1990s, but little progress has been made.

By the time plans advance, the economic situation in the Gulf could have changed significantly. VAT was last studied seriously in 2009. Higher oil prices and regional unrest pushed it back down the agenda as GCC governments could afford to increase spending.

Governments will also be concerned with avoiding stifling economic growth and diversification by making the business environment less competitive, and stimulating consumer inflation.

GCC countries with large local populations, namely Saudi Arabia and Oman, will be especially keen to avoid destabilising increases in the cost of living.

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