By Devanshee Dave
The countdown to implement the Value Added Tax (VAT) has begun in the Gulf Cooperation Council (GCC) countries with only five months left to D-day. The new tax will be implemented from 1 January 2018. GCC countries mostly rely on the oil and hydrocarbon industry for its revenue and do not earn much from taxation. So, the new tax is going to be a challenge for the countries, which has to be handled with great care.
An insight into the trajectory of VAT
VAT was first introduced in 1954 and was adopted by France and currently, around 150 countries have adopted VAT as a source of generating revenue. According to the Organization for Economic Co-Operation and Development (OECD), with passing decades, the share of VAT revenue in the GDP (Gross Domestic Product) of OECD countries has enormously increased. It was 0.6 percent in 1965 and in 2012 it was noted at 6.6 percent. Also, during the same timeframe, VAT was approximately 20 percent of the total revenue on average, compared to a mere 1.8 percent in 1965. International Monetary Fund, World Bank and the OECD have been vanguards in encouraging countries to introduce and adopt VAT for a sustainable source of revenue at the onset of a global financial crisis.
What made GCC nations adopt VAT?
The oil and gas industry have been lucrative sources of government revenue in GCC economies. From 2011 to 2014, oil revenues were worthed between 70 to 95 percent of the total government revenues. But soon the prices sank to its lowest. The reason behind that was first, the rise of the U.S Shale market that boosted competition between U.S and OPEC countries which led to more supply than demand. The more the U.S Shale production was, the lesser was the demand for oil in the U.S from outside countries that affected OPEC the most.
Second, the slowdown in the Chinese economy and recessional conditions in the European Union (EU) were another reason for the downfall of the oil prices. Whereas, to cop up with the lower prices, supplies were not cut down. Saudi Arabia contributes to one-third of the total production of OPEC nations but it was shrewd to not cut the production and in January 2016, that led to the deepest price fall at $27.67/per barrel, the lowest since 2003. All that resulted in the pressure to increase revenues on GCC governments in order to increase economic growth, leading to the decision on VAT.
Glitches in the VAT Implementation in GCC
All the six GCC countries including Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates have signed the agreement. GCC VAT is expected to be modelled similarly to the existing VAT model of the EU. The standard rate of VAT would be 5 percent. In addition to that, each country would develop and implement domestic legislation managing the local trade, intra-GCC trade and international trade. VAT is going to affect most of the industries in GCC nations but financial services, consumer and industrial products, technology, media and telecommunication sectors will be majorly affected.
However, the basic food industry, some medical equipment, certain transportation means and export of goods are expected to be zero rated. The healthcare and education services could also get an exemption from VAT. The focal point of concentration, oil and gas industry is expected to be exempted as well. GCC VAT rate of 5 percent is comparatively very low than the OECD average VAT of 19 percent. According to IMF, only 5% VAT implementation is forecasted to increase VAT revenues in GDP percentage from 0.8% to 1.6%.
Trade between India and GCC post VAT
As per information published on the Middle East Institutions site, Indias trade with GCC countries has rapidly increased from $9.5 billion in 2000-01 to $77.8 billion on annual average during the period 2011-15. The Indian export to GCC nations has doubled from 2006 to 2016 amounting $2,62,290. In the past two decades, India has made around ten free trade agreements with GCC nations and has recently announced its 16-nation Regional Comprehensive Economic Partnership which will benefit GCC nations. The free trade agreements between both are strong and that creates enormous opportunity for India in agricultural and industrial products. VAT implementation may affect Indian exports depending on the type of legislation the gulf countries adopt in the future, which is quite uncertain as of now.
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