WILL NEW TAX SPUR ECONOMIC REFORM IN UAE, SAUDI ARABIA?
Saudi Arabia and the United Arab Emirates began applying a selective commodity tax on tobacco, energy drinks and soft drinks last year [Faisal Al Nasser/Reuters] |
Saudi Arabia and the United Arab Emirates are ringing in the new year
with the introduction of a five percent value-added tax (VAT) on most goods and
services, in an effort to boost revenue and revive their oil-dependent
economies.
The tax, which goes into effect on Monday, will be imposed on a wide
range of commodities, including food, clothes, fuel, entertainment,
electronics, and telephone, water and electricity bills.
Rent, real estate sales, airline tickets and school fees are excluded
from the scheme.
The move is part of a region-wide measure agreed upon by the six Gulf
Cooperation Council (GCC) member states in Riyadh in 2016.
"The imposition of VAT will help to raise tax revenues of the
Saudi government to be utilised for infrastructure and developmental
works," Mohammed Al-Khunaizi, a member of Saudi's Shoura Council, said on
Sunday.
The other GCC members - Qatar, Bahrain, Oman and Kuwait - have until
January 1, 2019, to impose the tax.
DIVERSIFYING THE ECONOMY
Tim Callen, the International Monetary Fund (IMF) Mission Chief for
Saudi Arabia, told Al Jazeera that the introduction of the VAT is "an
important step in the right direction" and "likely to be positive for
investors in the longer term".
"Government revenues in the GCC are very reliant on the proceeds
from the sale of oil," he said. "This makes them vulnerable to swings
in the oil price. It is important that the GCC countries diversify their
sources of government revenue to reduce this reliance."
According to IMF estimates, the planned VAT rate in the Gulf nations
will raise additional revenues of some 1.5 to 3 percent of non-oil gross
domestic product, depending on the country.
Both Saudi Arabia and the UAE - like other Gulf nations - have suffered
since oil prices crashed four years ago.
In June last year, on the recommendation of the IMF, Saudi Arabia and
the UAE officially applied a 100 percent selective commodity tax on tobacco and
energy drinks and 50 percent on soft drinks.
I think it [VAT] defeats the whole purpose of people coming into Dubai and investing their time, life, money and career.
In addition, since last July, Saudi Arabia has levied fees on
expatriates' dependents of all nationalities. Corporate income taxes are also
imposed in some Gulf nations.
However, experts say the implementation of the new value-added tax will
not offer a "big boost" to the two oil-dependent nations.
"It is unlikely to impact the economies or the GDP. Both Saudi
Arabia and the UAE have outward-looking economies that are not based on
domestic consumerism," Ellen Wald, author of the upcoming book Saudi, Inc.
and a non-resident scholar at the Arabia Foundation, told Al Jazeera.
Jane Kinninmont, a senior research fellow at the Chatham House
think-tank in London, said the effect on the overall economy would be mixed.
"VAT transfers money from consumers to the government, so it will
help boost the government's non-tax income, but may also dampen private
consumption," she said.
SAUDI VISION 2030 MASTERPLAN
In December, Saudi Arabia unveiled its largest state budget - a record
978 billion riyals ($261bn) - for the current fiscal year.
The Kingdom projects it will generate about $209bn in revenue this year
but run a deficit until 2023, according to the finance ministry.
Crown Prince Mohammed Bin Salman is spearheading the government's
Vision 2030 masterplan to revitalise and diversify the Kingdom's oil-dependent
economy.
Saudi oil giant Aramco will sell five percent of its shares in what
could be the world's largest initial public offering, expected to raise $100bn
this year. The deal is at the heart of Saudi Arabia's economic reform
programme.
Roby Barrett, a Gulf expert at the Middle East Institute in Washington,
DC, noted: "My view is that entire societies don't get transformed in a
decade. It takes generations and generations, and so we'll see what happens by
2030."
COST OF LIVING
Uniforms, books and bus fees at schools will be taxed under the VAT
scheme, as will higher education in the UAE. Fuel prices in the UAE will
experience a four to six percent rise compared to last month, according to the
Ministry of Energy.
Experts are predicting a 1.5 percent increase in living costs, the
Abu-Dhabi-based National newspaper reported.
Meanwhile, Saudi Arabia is set to raise prices for domestic cooking gas
and jet fuel by about 80 percent in January 2018, according to a Bloomberg
report.
"On a more long-term scale, as a general rule with VAT, the
lower-income residents feel the impact of a VAT more because they spend a
larger percentage of their incomes and wealth," Wald said.
"However, in comparison to most other developed countries, the
population will have little to complain about."
Still, there are concerns among residents over the increase in their
household expenditures.
One expatriate and Dubai resident, who spoke to Al Jazeera on condition
of anonymity, said the VAT would be "one tough pill to swallow for
many".
"I think it defeats the whole purpose of people coming into Dubai
and investing their time, life, money and career, thinking they will save that
extra bit of money, considering it was a tax-free city," he said.
"Initially, it might not rattle the financial equation of my
household a great deal, but it will surely creep in on us as they increase it
every year."
SOURCE : AL JAZEERA NEWS
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