The introduction of value added tax (VAT) may harden inflation across the Gulf Cooperation Council (GCC) region but the short-term impact will be offset by the long-term benefits, according to CFA (certified financial analyst) Society Emirates.
“CFA professionals see VAT as a paradigm shifting reform in the GCC’s fiscal policy and are unanimous that it will lead to higher inflation,” Amer Khansaheb, president of CFA Society Emirates said, after releasing the survey, which assessed the impact of introducing VAT across the GCC.
“Although inflation rates are also heavily influenced by interest rates and economic growth, the immediate effects will pose challenges to both consumers and businesses. The additional costs will only be marginally felt by the day to day consumer, but it will have a bigger effect on higher budget purchases,” Khansaheb said, adding 73% of the professionals surveyed stated that consumer good are more expensive in the GCC than their home country; hence VAT will add an additional burden to consumers, leading to higher prices and resulting in inflation.
“However, the short-term impact will be offset by the long-term benefit VAT will bring to the regional economies,” he said.
The online survey was conducted from May 1 to 31. Participants included 68 CFA Society Emirates members, as well as those with charters pending, in the UAE.
With the UAE set to become the first country to introduce VAT by 2018, 82% of the respondents said that this will lead to higher inflation rates. They noted that demand for luxury goods will be affected the most by additional VAT costs followed by cars, tobacco and real-estate. Meanwhile, CFA professionals saw healthcare as the sector which will be least impacted by the additional VAT costs.
Another “significant” finding was that 80% of the respondents said that they would consider moving abroad if an income tax were to be introduced, since 59% of them revealed that the GCC’s tax-free environment was a key factor in their decision to reside here. On the corporate level, employers will not consider relocating if corporate tax is introduced as per 59% of the respondents, although 41% of them believe otherwise.
According to the survey, consumers, instead of retailers, in the region will have to bear the additional costs of VAT. Furthermore, CFA members also affirmed that there are various hidden or indirect taxes already in place, highlighting hotel taxes as the most obvious example, followed by road tolls as well as car registration and parking fees.
Stressing that there is an urgent requirement to diversify government revenues, which are currently still largely dependent on income from oil and gas, Khansaheb said VAT is a measure that will allow more stability given that the outlook for crude remains volatile.
Additionally, VAT would encourage more responsible consumer spending patterns and prices would have to be reduced in order for demand to match this trend; which would eventually lead to a decrease in inflation rates, he added.