VAT in the Gulf: What Economic Impact Can We Expect?

When I wrote three months ago about why the economic changes afoot in the Gulf region have taken on a whole new urgency in “The challenge of change: And why it matters this time”, my analysis was very much framed against a background of anything but business as usual.

I remain firmly of the opinion that the major economic restructuring that is needed in the GCC is far more likely to come as a result of necessity rather than suggestion.

And so it has proven. For many years numerous global bodies such as the IMF and World Bank spoke of, for example, the need for subsidy reform and enhancement of the private sector, as indeed has OBG.

However, it has taken the precipitous reduction in oil prices – something that looks here to stay at least in the medium term – for the new urgency we are witnessing now to come about, as exemplified by the impending rollout of the GCC-wide value-added tax (VAT) on January 1, 2018.

Gulf economies pushing more private sector growth

The key to the success of the various initiatives aimed at steering these economies towards a sustainable post-hydrocarbons future is clearly going to be efficient implementation, but enacted in a way that does not dampen all-important sentiment.

Sentiment is key for both domestic and foreign investors, as well as the ever-fickle markets. This is true the world over, but is particularly so in the Gulf, and it is key to the private sector’s long-term prosperity.

Our OBG Business Barometer: CEO Surveys are showing that executives remain broadly positive and are eyeing capital expenditure over the next 12 months, but they also have real concerns with regard to regional security, the slowdown of the Chinese economy and the potential for US interest rate rises. The ongoing dispute within the ranks of the GCC will inevitably be a factor, too.

Transforming economies that have traditionally relied on public spending for their growth momentum to ones driven by autonomous private sector growth is what this is all about.

However, as economic growth has moderated, there is a danger that non-oil private sector growth will slow, too, and there is evidence to suggest this is the case.

VAT introduction part of a systemic change

While there are numerous factors at play here, the systemic changes that are being made, such as the introduction of VAT, have the capacity to impact growth in the short term. A businessman I was speaking to recently ruefully said that the only people who will benefit at the beginning will be lawyers and bankers.… This can of course be said of most business laws!

However, the broader point is how VAT is implemented, how the costs are passed on to consumers, how IT systems and cash registers are set up, and how all of that impacts trade. So yes, lawyers, professional services companies and banks will all be offering advice – and soon no doubt charging VAT on top of their service fees.

New layer of economic analysis to be possible

The benefits of implementing VAT go above and beyond those of a revenue-generating exercise, though the inflows to Treasuries will undoubtedly be welcome. Requiring companies to register for VAT purposes enables a new layer of economic analysis to be undertaken: authorities will be able to look at how an economy is behaving and identify patterns – as well as eventually spot any organisation seeking to avoid paying.

From the conversations I’ve had with businesses in the region, it seems that while concerns exist, particularly in terms of clarity of implementation and process, there is no doubt that it is happening. Most recognise that taxation is an important element of socio-economic maturity, too.

The key, though, will be for the various authorities to continue doing all they can to ensure sentiment remains buoyant and the business environment conducive.