ChristineLagarde, Managing Director of the IMF, says indirect taxation in the form of VAT in low single digits is the most viable option for GCC states: Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman.
“It is time people are made to understand that public services need to be priced. Options are limited for governments.
Either a viable pricing mechanism needs be implemented to fund public services or governments can resort to big borrowings which is not sustainable in the long term,” said Lagarde.
A GCC-wide VAT tax is scheduled to start in 2018.
The region needs to adjust its fiscal affairs to the new reality of low oil price, but the introduction of taxation in a region that is used to subsidies and absence of any tax require lots of preparation.
“Even with a low tax rate of 5 per cent, with the introduction of VAT, it will not be difficult for GCC states to generate tax revenues up to 2 per cent to gross domestic product,” said Lagarde.
Compared to VAT, corporate income tax (CIT) is more likely to act as a disincentive to businesses considering investment in the region and more negatively impact GDP growth. A personal income tax presents an obvious challenge to the tax-free branding that has served the region so well in the past.
