Gulf VAT threatens inflation

Mon 18th Apr 2016

The Chartered Financial Analyst (CFA) Institute has warned that the introduction of Value Added Tax to the six Gulf states would likely create an inflationary effect.

The CFA surveyed its members, and found 33% of the respondents believed there may be a rise in the region’s VAT rate as the result of the introduction of VAT. The current rate is around 4% inflation, although this may fall as the dollar (which oil is priced in) rises and imports fall.

Basic essentials, such as food, will likely be at zero rate VAT to shield the less well off in society from the inflationary effects.

A number of countries, including most recently the Channel Island of Jersey, experienced sharp price rises on the introduction of indirect taxes like VAT.

The Gulf States are likely to introduce 5% VAT from 2018 in response to the halving of global oil prices in the past two years. The countries need to divest their income from oil duties, and widen the tax base. The six states have agreed draft principles on a harmonized regime to minimize the impact on cross-border trade. It is not yet confirmed the start dates, and some states may proceed early.