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Implementing VAT in GCC: An Impact Analysis


Consumer Goods and Retail | Nov, 2017

What is a VAT?

It is an indirect tax associated on the utilization of most goods and services. VAT is imposed by VAT-enrolled organizations that supply good and services in the course or advancement of their business. VAT is also appropriate on the import of goods. VAT is imposed at each phase in the production network and is gathered by organizations for the benefit of the government. VAT is at last brought about and paid by the end consumer.

How is VAT calculated?

The VAT collected from end consumer by the retailer, distributor or seller must submit to the government. Let’s take a simple example how manufacturers, dealer or seller will charge after the addition of VAT in the total bill.


In GCC, when will VAT be applied? 

On January 1, 2018, VAT is likely to be introduced in GCC and The GCC VAT will apply at the rate of 5 percent. There is a possibility of exemptions for some supplies and incentives for companies which are operating in free zones in some sectors.

Cost of living will be affected by VAT?

YES, VAT will increase the cost of living in GCC countries but slightly. It would vary depending upon the consumers lifestyle or standard of living. Every customer has to pay extra 5 percent on the total purchase bill which will increase the total billing amount.

How different sectors are affected by VAT in GCC?

  • Real Estate: The VAT on real estate depends directly on whether the property is residential or commercial. Sales and lease of commercial property will be taxable under the standard rate of 5 percent VAT. While the residential properties including sales and lease are completely exempt from VAT.
  • Financial Services: According to the government fee based financial services will be taxed but margin based products are likely to be exempt.
  • Tourist & Visitors: Tourists are a significant source of income for gulf countries. YES, tourists will also have to pay VAT on every purchase. Government mentions that VAT charges are very less the visitors can easily pay the amount. This will be an extra benefit for the government and will help the government to improve the countries basic requirement of infrastructure etc.
  • Automotive: Even though the VAT rate is 5%, it is almost unavoidable that sales of automobiles will become focus upon implementation of VAT in the GCC. The average VAT rate around the OECD countries is 19%. The supply chain nourishing the automotive retail business is also important and which includes vehicle manufacturers, the local importers, and the distributors. The dealer and manufacturers need to be careful about the pricing of the vehicles after the VAT implementation. In GCC, Saudi Arabia and the UAE are the two most major automotive markets backed by low fuel costs, high per capita disposable income, low customs duty and growing population. There are no manufacturing activities taking place in GCC. It relies on imports to fulfil the demand. The increase in price of automobile due to VAT will impact the demand for automobiles in GCC.
  • FMCG: The grocery segment will be least affected as most of it will be exempted. Consumer electronics, will be hardest hit by the implementation of VAT. As the VAT is just 5 percent, it will not have much impact on the cost of goods. The retailers are fully prepared for VAT implementation. Saudi Arabia and UAE are the first two countries in GCC to implement the VAT.
  • Oil & Gas: It is expected in the GCC region of oil and gas suppliers may be taxable at zero-rate. Some of the taxable supplies in this sector are leasing of ships, seismic surveying, drilling services, pipeline operations, storing and handling of installations etc.

Which sectors are exempted from VAT?

  1. Local passenger transport
  2. The supply of some financial services
  3. Residential properties
  4. Bare land

Sectors that are Zero Rated:

  1. Exports of goods and services to outside the GCC
  2. Newly constructed residential properties, that are supplied for the first time within 3 years of their construction
  3. Certain investment grade precious metals (e.g. gold and silver)
  4. International transportation, and related supplies
  5. Supplies of certain sea, air and land means of transportation (such as aircrafts and ships)
  6. Supply of certain education services, and supply of relevant goods and services
  7. Supply of certain Healthcare services, and supply of relevant goods and services.

The key features of the Gulf Cooperation Council (GCC) Value Added Tax (VAT) Framework

According to UAE government estimates in September, the taxes are estimated to create around Dh7 billion in annual revenues for the Federal Budget.

The UAE Federal and Emirate governments provide different public services which includes public schools, hospitals, police services, roads, parks and waste management service and these services are paid by the government. The government states that VAT will provide GCC countries with a new source of income which will contribute in the public services. Moreover, it will also help government move towards its vision of reducing dependence on oil as a source of income.

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