Abu Dhabi: Essential items, notably food and medicines, are traditionally exempt under a VAT system and this could be contemplated under any future VAT (value added tax) system in the GCC, according to a tax expert from global consultancy, PwC.

“Some countries would normally exempt necessary items for social objectives. These are traditional areas to which countries consider applying special treatment to address social impact. However, it is increasingly recognised that a broad-based VAT system with few exceptions results in a more efficient and neutral system, while social objectives could be achieved with other tools outside of the VAT system” Jeanine Daou, tax partner from PwC, said in an interview with Gulf News on the sidelines of Back to Business event organised by BeNeLux (Belgium, Netherland, Luxembourg) Business Council in Abu Dhabi late on Tuesday.

She said that VAT seems to be high on the agenda of the governments in the GCC, which are working towards an agreement on a legal common framework.

“There are talks at the GCC level to have a common framework, which could be agreed upon by the end of this year. Individual states still need to issue their own legislation based on the common framework. In our view, it is not expected to be introduced before 2017-2018,” she said.

Doau provided technical assistance through the World Bank and the International Monetary Fund to Middle East governments with regard to tax and VAT policies and legislation. “VAT would be introduced at a relatively low rate, likely between 3 and 5 per cent, which will mitigate burden on consumers and on the economy overall,” she said. “When compared to other countries in the Middle East region like Lebanon for example which has ten per cent, the rate is relatively low.”

According to PwC’s latest publication “Paying Taxes”, more than 160 countries in the world have VAT including Jordan, Yemen, Lebanon and Palestine in the Middle East region.

When asked about whether VAT will have an impact on inflation, she said it would probably have a one-off inflationary impact in the first year of introduction, and some impact could be absorbed by the market. “Further studies are required to measure the exact inflationary and economic impact.”

The Ministry of Finance in the UAE has been conducting a series of studies on the implementation of a draft VAT law, along with the other GCC countries.

In a statement in August, the Ministry said the draft law is still pending and under negotiation due to the absence of a final agreement among GCC countries on the tax rate and a list of tax exemptions.

It said concerned sectors and entities will have around 18 months after the enactment of the law to implement and fulfil the requirements of their tax obligations.

The new development comes as government spending goes up in the GCC and revenues dwindle due to decline in oil prices.

From $115 per barrel, oil prices have plunged to less than $50 per barrel in recent times. Oil prices are unlikely to touch $100 per barrel in the next few years as production goes up and demand weakens.