IMF asks for VAT, income and property tax in GCC region

The international Monterey Fund has suggested the oil-rich GCC nations to introduce value added tax. Speaking at the two-day Arab Fiscal Forum, being organized by the Arab Monetary Fund, here in the capital, Ms. Christine Lagarde, managing director of IMF said the GCC region can raise revenues from corporate income tax as well as from property and excise taxes.

The oil producing region that lost $340 billion or 20 per cent of gross domestic product, to oil prices plunge in 2015, should continue to invest in building tax administration capacity that could eventually allow for the introduction of personal income tax. In her speech to the Forum, the managing director said the oil-exporting countries have been heavily affected by the recent plunge in oil prices."Not only have oil prices fallen by around two-thirds from their most recent peak, but supply and demand-side factors suggest that they are likely to stay low for an extended period. The size and likely persistence of this external shock mean that all oil exporters will have to adjust by reducing spending and increasing revenue," the managing director general said.

She said the fiscal adjustment needs vary from country to country. For instance, due to their prudent policies, most members of the Gulf Cooperation Council are now in a position where they can pace their adjustment over several years and thus limit the impact on growth. "It is also worth remembering that GCC economies have made large fiscal adjustments in the past," Ms Largarde said, adding that they can "do it again."

At the same time, she stressed that these economies need to strengthen their fiscal frameworks and re-engineer their tax systems by reducing their heavy reliance on oil revenues and by boosting non-hydrocarbon sources of revenues. This would help bolster growth and job creation and at the same time help to maintain debt sustainability and strengthen resilience, she told the Arab finance ministers. It also provides a unique opportunity to design tax systems that emphasize fairness, simplicity, and efficiency.

She asked the GCC bloc to start the revenue generating efforts by putting in place a simple system that initially focuses on VAT, at a low single-digit rate, such a tax could raise up to 2 percent of GDP. Add to this a greater emphasis on corporate income tax, as well as property and excise taxes. Progress is already visible in many countries, as in Kuwait, for example, the IMF has assisted in the study and design of broad-based taxes, such as VAT and business profit tax.

"This work has contributed to a national dialogue on why and how Kuwait should diversify its revenue sources, "the Fund's top official said. Proponents of reform argue that this would allow the country to better manage the fiscal risks associated with volatile oil prices, she said. In his remarks on the occasion, Obaid Humaid Al Tayer, Minister of State for Financial Affairs said that the GCC nations have strengthened their institutions to boost competitiveness and economic sustainability.