Abu Dhabi: The proposal by the Ministry of Finance to introduce Value Added Tax (VAT) stemmed from the fact that revenue from crude oil and other hydrocarbon products had gone down because of low oil prices, an analyst told Gulf News.

Sanyalaksna Manibandhu, Head of Research, NBAD Securities, said the decision was expected and the next step would be potentially corporate tax and income tax.

“The revenue from crude oil and other hydrocarbon products had gone down because of the declining oil prices. Depending on how VAT and corporate tax is introduced that would obviously increase the revenue and reduce the fiscal deficit.”

He said that the government might be selective in introducing the tax like they may not put it on food but have it on other goods like cigarettes etc.

“So it can be something that it doesn’t hit the poor, but does hit people who can afford to buy expensive goods.”

GCC countries have been introducing a slew of measures to overcome fiscal deficit as oil prices go down. In a landmark decision, the United Arab Emirates has scrapped fuel subsidies last month. The country increased petrol prices by more than 20 per cent.

From $115 per barrel last year, oil prices plunged less than $50 in recent times. The trend is likely to continue in the coming months as demand weakens and oil production increases.

Manibandhu said the rationale behind the decision to deregulate fuel prices is to reduce fiscal deficit by cutting down on subsidies.

“The fuel prices were increased as it was too cheap and consumers tend to overuse it. The government will spend less on subsidy and finish off deficit.”

The introduction of VAT in all GCC countries is to avoid unfair advantage because of the tax structure, he added.

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

This is based on a previous agreement between the UAE and all GCC states to impose a VAT tax law simultaneously.

The draft law is still pending and under negotiation due to the absence of a final agreement between GCC countries on the tax rate and a list of tax exemptions, according to Ministry of Finance.

In a report released this month, International Monetary Fund suggested that the UAE consider imposing VAT at a 5 per cent rate, a 10 per cent corporate income tax, and a 15 per cent excise tax on automobiles.