Christine Lagarde, Managing Director of the International Monetary Fund, said that GCC governments are limited in how they can raise revenues to support government services, making the implementation of a value-added tax necessary.
“It is time people are made to understand that public services need to be priced. Options are limited for governments.
Either a viable pricing mechanism needs be implemented to fund public services or governments can resort to big borrowings which is not sustainable in the long term,” said Lagarde.
Lagarde was speaking at a press conference on Wednesday following the announcement of a GCC-wide VAT tax scheduled to start in 2018.
Earlier this week said the region needs to adjust its fiscal affair to the new reality of low oil price, but said that introduction of taxation in a region that is used to subsidies and absence of any tax require lots of preparation.
The IMF official said indirect taxation in the form of VAT in low single digits is the most viable option for GCC states in the first stage of taxation as implementation of direct taxes require a fairly well developed institutional framework.
“Even with a low tax rate of 5 per cent, with the introduction of VAT, it will not be difficult for GCC states to generate tax revenues up to 2 per cent to gross domestic product,” said Lagarde.
Compared to VAT, corporate income tax (CIT) is more likely to act as a disincentive to businesses considering investment in the region and more negatively impact GDP growth. A personal income tax presents an obvious challenge to the tax-free branding that has served the region so well in the past.
