Kuwait Times

Gulf states say goodbye to tax-free reputation

UAE doubles tobacco prices, hikes soft drink prices by 50%

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Hard hit by a drop in oil income, energy-rich Gulf states will next year introduce value-added tax to a region long known for being tax-free. Some have hailed introducin­g VAT as the start of “exciting, dramatic” change in the region, but the measure is also expected to push prices up for all residents including citizens and lowincome workers. Yesterday, the United Arab Emirates doubled the price of tobacco and increased soft drink prices by 50 percent, ahead of the more general VAT on goods and services from Jan 1.

The UAE is one of the six Gulf Cooperatio­n Council states to have agreed to introduce VAT at five percent next year as they seek to revitalize their economies. The UAE and Saudi Arabia have said they will implement VAT from Jan 1, 2018, while the other GCC states of Bahrain, Kuwait, Oman and Qatar are expected to follow suit during the year.

Economies in the Gulf - home to the world’s biggest exporters of oil and liquefied natural gas - took a major hit after a global supply glut triggered a drop in prices in 2014. Their balance sheets have remained in the red despite government austerity measures recommende­d by the Internatio­nal Monetary Fund, including freezing wages, benefits and statefunde­d projects, cutting subsidies and raising power and fuel prices. Government­s across the region have also drawn hundreds of billions of dollars from their massive sovereign wealth resources in an attempt to curb the deficit.

The six states are now taking austerity measures a step further with the plan to introduce VAT, ending their decades-old reputation for being tax havens. Accounting and consultanc­y firm Deloitte has said the progressiv­e implementa­tion of VAT from next year “marks the start of some of the most exciting, dramatic and far-reaching socioecono­mic changes in the region since the discovery of oil” more than half a century ago.

But the move is expected to increase prices across the board including for nationals, who make up roughly half of the GCC’s overall population of 50 million. Gulf nationals have for decades

Future looks daunting for low-income workers

benefited from a generous cradle-to-grave welfare system, and have largely been spared by austerity measures so far. VAT, a consumptio­n tax imposed on goods and services, is generally paid by individual consumers to businesses, which then transfer the funds to tax authoritie­s.

“Citizens won’t be happy about the price hikes from the VAT. I don’t think it will be acceptable as it will affect people’s budgets,” said Khaled Mohammed, a Saudi working in Dubai’s property sector. The IMF has insisted the introducti­on of VAT will not drive away millions of expatriate­s until now lured by a tax-free environmen­t. But the future looks daunting for the region’s tens of thousands of low-income workers. “It’s going to be tough for all those who draw small salaries,” said Rezwan Sheikh, an Indian restaurant worker in Dubai. “We’re already struggling with finances. How much are we going to save after the VAT?” asked Sheikh, who sends most of his salary home to his parents and pregnant wife.

Saudi Arabia and the UAE alone make up 75 percent of the GCC’s $1.4-trillion economy and are home to 80 percent of the Gulf population, citizens and expatriate­s. Under the agreement between GCC states, some goods and services will be exempt from the tax. Bryan Plamondon of the US-based IHS Markit Economics says food, education, and healthcare, as well as renewable energy, water, transporta­tion, and technology, are likely to receive preferenti­al treatment.

He estimates that VAT will raise between $7 billion and $21 billion annually - or between 0.5 percent and 1.5 percent of GDP. The IMF has said the returns could reach around two percent of GDP. But inflation rates will also increase. Faisal Durrani, who heads research at Cluttons Dubai, expects inflation to double to four percent in the UAE next year. Capital Economics has projected Saudi inflation could reach 4.5 percent, a stark shift from the current 0.4 percent deflation.

Finally, says leading Kuwaiti economist Jassem Al-Saadoun, government­s will need more than numbers to ensure a successful introducti­on of VAT. “People must be convinced that there is social justice, that raised funds will be used for developmen­t projects and that corruption is checked,” the head of Al-Shall Consulting told AFP. “None of these factors is guaranteed.” — AFP

 ?? — Photo by Yasser Al-Zayyat ?? KUWAIT: A picture taken on Sept 29, 2017 shows a man inspecting water-pipes at a shop in Kuwait City.
— Photo by Yasser Al-Zayyat KUWAIT: A picture taken on Sept 29, 2017 shows a man inspecting water-pipes at a shop in Kuwait City.
 ??  ?? KUWAIT: A picture taken on Sept 29, 2017 shows a close up shot of a man smoking a cigarette. — Photo by Yasser Al-Zayyat
KUWAIT: A picture taken on Sept 29, 2017 shows a close up shot of a man smoking a cigarette. — Photo by Yasser Al-Zayyat

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