Introduction of VAT was one of the new income streams that GCC states wanted to create. It's clear that those economies which brought VAT in are benefiting in their diversification push. Image Credit: Shutterstock

The VAT regime, which has been introduced in some of the GCC countries since 2018, has become an important part of their tax system. It has also become an essential component of state revenues, contributing to diversifying income sources, reducing their reliance on oil revenues, and bolstering financial stability. It’s an approach that was welcomed - and praised - by specialised international organisations.

While some GCC countries are yet to adopt VAT - for their own reasons - these past five years and more have shown various facts and disparities in the decision to implement VAT or not. In a recent survey conducted on the prices of some durable goods, such as cars and electronics across all GCC countries, it was found their prices are quite similar, even bordering on being identical.

This is with knowledge that the percentage of VAT in GCC countries ranges from 5-15 per cent, a variation considered normal. And a range that varies in all economic blocs and unions like the European Union.

According to the survey, the prices of durable goods are almost uniform across GCC countries, whether those implementing VAT or those yet to apply it so far, drawing conclusions about the significance of VAT returns. These revenues, which is estimated at tens of billions of dollars depending on the size of each Gulf country’s economy, accrue to the state treasury.

Conversely, in the absence of VAT, these revenues become the seller's share, leading to a significant and sustainable revenue source being missed by the state budget. Such revenues play an important balancing role in the event of fluctuating oil prices, which serve as the primary source of budget financing.

Absence of VAT generated gains

This also means that consumers in countries without VAT did not benefit from its absence, contributing to increasing the profits of sellers, who have received high returns in the past due to the absence of other forms of taxes.

For electoral reasons, certain legislative councils have hindered the implementation of VAT, which comes as part of financial reforms necessary to prepare for transition to a post-oil era.

A professional approach requires a reassessment of decisions concerning the non -application of VAT, especially after experience has proven that the consumer does not benefit from it (except for the tobacco tax, an excise taxation that has nothing to do with VAT). The tobacco tax has led to the smuggling of cigarettes and other tobacco products in limited operations among GCC countries, another topic that has nothing to do with VAT.

A professional reassessment requires a long-term insight into the economic future, the stability of economic conditions, and the existence of fixed and sustainable financial resources for the state budget away from oil as a depleted wealth.

There is a significant and growing increase in the budget resources of countries that adopted VAT, unlike those that did not, whereby non-oil budget resources remained stagnant without change, or even declined.

Keep politics out

Professionalism also requires the need to isolate political intentions, particularly purely electoral ones, from a secure and stable economic future by finding new resources, not only for the budget, but also for economic and social development as well as for the implementation of more projects that provide jobs and contribute to the diversification of GDP.

Financial reforms have become a fundamental part of GCC economic policies in the past decade, as it is not possible to maintain the same fiscal policies that were applied 50 years ago. This is because doing so means stagnation, missed opportunities and ignoring the enormous economic changes that swept the global economy during this period.

These changes have been seen in the field of energy with the aim of reducing dependence on fossil fuels, and increasing reliance on renewable energy sources, an approach that requires keeping pace with such changes and preparing for the future with strong and fixed financial resources.