Ahmed Alsulaiman, Managing Partner, KSI - Bahrain Consultants & Public Accountants: Viewpoint

Text size +-
Ahmed Alsulaiman, Managing Partner, KSI - Bahrain Consultants & Public Accountants

Viewpoint: Ahmed Alsulaiman

In 2007 the six-member GCC agreed in principle to try out a VAT on a collective basis. It is important to remember that oil was trading at above $140 per barrel in early 2008. Some nine years later, when oil was trading at around $30 per barrel, or 72% less than in 2007, the GCC states faced calls from international bodies including the IMF to broaden their revenue sources and diversify their economies away from an over-reliance on hydrocarbons. The IMF had also criticised GCC countries over large subsidies for their citizenry and the reluctance of their governments to tax their people on goods and services.

In February 2016 it was announced in a press conference that VAT will be implemented in the GCC region in 2018, with limited exceptions for basic food items, health care and education. While the exact regulations surrounding the governance of VAT are yet to be announced, indirect tax experts have encouraged businesses to begin preparing systems and processes, and to make themselves fully aware of the commercial implications to ensure a smooth transition into the VAT era.

Taxes come in many forms. There are direct taxes that can be levied on profits and incomes (e.g. corporate income tax and personal income tax), and on economic rents (e.g. mineral taxes or property taxes), and there are indirect taxes that are levied on consumption (e.g. VAT and excise taxes). The volume of literature on the relative merits of one form of tax over another is staggering, yet there is one clear trend that can be observed. A general consumption tax such as VAT is taking an increasingly large share of the total tax take in many jurisdictions. Data from the OECD, for example, indicates that in 2012 VAT accounted for 20% of total tax revenues in member countries, compared to 9% for corporate income tax.

Moreover, a “tax-free” system is a major attraction for investors, and taking the route of implementing VAT may be the best solution since the majority of the cost of VAT falls squarely on the consumer rather than on businesses, and serves as a neat way of balancing the potentially competing requirements.

The GCC region is known for its attractiveness as a retail destination, given that prices for many desirable consumer items remain relatively low. A VAT could adversely affect this situation.

Critics further argue that this is not the right time to talk of VAT, as this is a time of crises. This is due to oil price shocks and high inflation, the latter being particularly true in the case of Qatar, where housing costs have been rising. Moreover, VAT is regressive in the sense that it impacts those on lower incomes more, in relative terms, than those on higher incomes. However, it is true that those on higher incomes are impacted more in absolute terms. After mooting the idea in 2007, the GCC states put their VAT plans on the backburner as the global financial crisis took hold the following year and the Arab Spring began in earnest in 2011.

Another argument against the implementation of VAT relates to the huge subsidies that most GCC states offer to their populations on many food items and petrol. Critics argue that these must be removed first to augment government income before a tax measure is considered. However, this would result in a severe populist repercussion, and it is unclear how far GCC governments would take these measures.

A levy on luxury items makes sense because people have the choice to not buy these products if they find them to be too expensive. This differs from basic commodities like foodstuffs, where pricing is socially and politically sensitive, and can directly affect the lower end of the demographic.

The backers of VAT argue that since it is a consumption tax it could help fight rising consumerism in the GCC states. If VAT is imposed at the rate mooted by the GCC Council of between 3 and 5%, it is unlikely that wealthy consumers will notice the difference.

You have reached the limit of premium articles you can view for free. 

Choose from the options below to purchase print or digital editions of our Reports. You can also purchase a website subscription giving you unlimited access to all of our Reports online for 12 months.

If you have already purchased this Report or have a website subscription, please login to continue.

The Report: Bahrain 2017

Accountancy & Tax chapter from The Report: Bahrain 2017

Previous article from this chapter and report
Impact of Brexit on Bahrain's tax regime
Next chapter from this report
Legal Framework, from The Report: Bahrain 2017

Articles from this chapter

This chapter includes the following articles.
Cover of The Report: Bahrain 2017

The Report

This article is from the Accountancy & Tax chapter of The Report: Bahrain 2017. Explore other chapters from this report.

Covid-19 Economic Impact Assessments

Stay updated on how some of the world’s most promising markets are being affected by the Covid-19 pandemic, and what actions governments and private businesses are taking to mitigate challenges and ensure their long-term growth story continues.

Register now and also receive a complimentary 2-month licence to the OBG Research Terminal.

Register Here×

Product successfully added to shopping cart