The introduction of value-added tax (VAT) across the GCC in 2018 is expected to boost government revenues but the tax burden in the short run is seen causing a surge in the headline inflation rate, resulting in the moderation of consumer spending, economists have said.
The impact of VAT on inflation and government revenue will vary depending on the proportion of consumption in the economy and how much of the consumption base is captured by VAT.
GCC countries have not yet published their individual VAT laws — there is scope for some differences in VAT classifications.
“We forecast that GCC countries will raise between 1.2 to 1.6 per cent of GDP [gross domestic product] in the first year after the introduction of VAT, with the UAE and Saudi Arabia likely to see the greatest revenue generation of about 1.5 to 1.6 per cent of GDP,” said Monica Malik, chief economist of Abu Dhabi Commercial Bank (ADCB).
“In the case of the UAE, we believe that the relatively higher revenue potentially raised from VAT reflects the larger share of private consumption in the UAE economy.”
According to the International Monetary Fund (IMF), VAT is highly effective at mobilising and diversifying government revenue. It is vital for the GCC countries to increase their non-oil and tax revenue, with hydrocarbons still dominating income for most governments in the region.
GCC states depend on hydrocarbon revenues more than other high commodity-exporting economies, with hydrocarbon revenues still accounting for between 50-85 per cent of total revenues.
This share has fallen from the pre-2014 levels, though largely due to the lower energy price and, to a lesser degree, to fiscal reform measures such as cuts to subsidies and introduction of fees.
Analysts expect to see revenue from VAT increasing in the second year onwards as the administrative efficiencies of VAT collection improve.
In the case of UAE, VAT revenue is expected to increase to 1.8 per cent of GDP in the second year of collection assuming there are no changes to VAT guidelines.
“We estimate that the UAE could raise revenue of about 1.6 per cent of GDP from VAT in the first year following its introduction,” said Shailesh Jha, an economist at ADCB. “In the case of the UAE, we estimate that the introduction of VAT in 2018 could help to bring the fiscal deficit down to a more balanced level. We currently estimate a fiscal deficit of just around minus 0.2 per cent of GDP in 2018 for the UAE. This is despite expectations of a pick-up in government expenditure, especially in Dubai as we approach Expo 2020.”
Although the VAT laws have not yet been published, analysts see the potential for Saudi Arabia earning about 1.5 per cent of GDP from VAT as it is likely to have the broadest VAT base. There are some indications that Saudi Arabia might apply the standard 5 per cent VAT rate to a number of sectors that were previously assumed to be zero-rated. These could include all food stuffs and local transportation, alongside private education and health care.
Source: Gulf News