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Kuwait to wait and watch VAT rollout in other state
August 26, 2017, 4:00 pm
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Saudi Arabia and the UAE are to become the first two states in the Gulf Cooperation Council (GCC) bloc to introduce Value Added Tax (VAT) from the start of 2018. Kuwait, along with Oman, Bahrain and estranged GCC member Qatar, is likely to launch VAT only by January 2019. This is in line with the decision made in December 2015, when finance ministers of the GCC states agreed on key issues in implementing a VAT system and accepted a staggered roll out date from January 2018 to January 2019.

Despite the general agreement on the need to introduce a VAT, there has been some foot-dragging among the GCC states to signing on to it. It was only in late January of this year that the Saudi Arabia became the fifth GCC state to approve the VAT and Selective Tax agreement. The hold-out among the six-nation GCC bloc was Kuwait, where the Council of Ministers finally gave its endorsement to the bill only in early August.

Signing on to VAT is the first step, and arguably the easy step, it is in implementing the law and in its finer details that the authorities are likely to face hiccups. Contrary to what its elaborate name suggests, there is nothing ‘unified’ in the ‘GCC Unified Agreement on Selective Excise Tax, the GCC Unified Agreement on Value Added Tax (VAT) and the Statute GCC Economic Judiciary Commission’. The unified refers to a ‘unity of purpose’ to ensure that VAT is introduced in the GCC in a coordinated manner; it does not imply that VAT laws will be identical across the bloc.

Nevertheless, at their mid-2016 meeting, GCC finance ministers agreed on a broad range of laws including setting the rate of VAT at 5 percent and introducing a selective excise tax of 100 percent on tobacco and energy drinks, and 50 percent on soft drinks. In addition a list of over 100 items, including basic food, medicine, medical supplies and other essential consumer commodities, were also exempted from VAT.

Basically, VAT is an indirect tax imposed by the government and ultimately paid by consumers of goods and services, with businesses acting as voluntary tax-collectors on behalf of the government. When a business charges VAT on a sale, it can reclaim VAT they have paid on their purchases. The difference between what they have charged on sales and paid on purchases is to be paid to the tax authorities. With consumers and businesses playing such an integral role, it is crucial that they ‘buy-in’ on VAT from the beginning.

Governments need to create ‘awareness’ and ‘preparedness’ programs to make sure that everyone is in on VAT before rolling it out. In a region where cradle-to-grave mollycoddling of citizens is the norm and taxes are an unheard of anathema, the introduction of VAT could take some doing. People will have to be ‘gently’ nudged into a tax paying culture.

Portraying VAT in a more positive light by pointing out how it could help fund education, health, social care, infrastructure and many of the other services that a cash-strained government is increasingly finding difficult to do, could raise awareness on taxation. Similarly, the fact that funds collected through VAT could encourage entrepreneurship, support startups, diversify the economy from its reliance on hydrocarbons and nurture greater private participation in the economy, could also be used to rope in the business community.

Preparing businesses for VAT readiness is a more complicated process that involves conducting awareness sessions and specialized workshops. Though VAT is a ‘self-policing’ tax — output taxes are netted off against input taxes at each successive stage of production and distribution — at each stage of implementation there could be a lack of clarity that the authorities will need to elucidate in advance.

An important feature of VAT is the exemption of certain goods and services. If all services or goods that a business sells are exempt, then the entire business is exempt from VAT and cannot claim VAT on its purchases. If only some of the goods and services are exempt then a partial exemption claim on VAT could be made. It is also worth noting that businesses may be required to pay the VAT at times that may not coincide with when the actual cash is collected from the customers and this stresses the requirement of proper cash management.

Experts say that businesses in the region will have start by identifying the VAT registration status of their business, whether they are in the exempt category, or their business income falls below the stipulated threshold for VAT inclusion. If they are an entity that needs to be registered under VAT, then they will have to assess their readiness for process and determine whether they would need to seek external professional support to review, revise and replace their internal processes.

Arbitrary price increases, incorrect filing of tax returns, lack of access to expertise and proper documentation are just some of the hassles that the implementation of VAT in GCC could potentially encounter. It is critical that the authorities provide comprehensive and understandable guidelines in a timely manner to enable VAT registered businesses to conform to the new requirements.

Introducing VAT and ensuring its compliance could also be an administrative hassle for the government. Given the current wage structure of public-sector employment in the GCC, the creation of a national VAT administrating body could very well end up eating a large chunk of VAT revenues. But then, that is a different story.


 

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