What is a value-added tax?
VAT is a tax charged on the ‘value-added’ at each point in the supply chain. From raw materials to finished goods, companies “add value” to a product by improving it. This can be measured and taxed, with the justification that each company is taxed only on the value that they bring to the product.
The baker is charged tax on the value of bread, minus the cost of the raw ingredients; the flour mill is charged tax on the difference between the wheat and the ground flour; and the farmer is taxed on the cost of wheat. This means that tax is split between the producers of a good.
What will the impact be on companies and consumers?
In the most simple case, companies see their profit margins fall, while consumers see prices rise.
Usually, both happen – companies absorb some of the cost of new taxes, while consumers see prices rise by less than the headline rate of tax. This also means that Gulf companies will have to acquaint themselves with a piece of bureaucratic arcana that is unfamiliar to them – the tax return.
Gulf governments have lost more than $300 billion from the collapse in the oil price from $110 per barrel in June 2014 to around $35 per barrel now. GCC states ramped up their spending in the decade of rising oil prices from 2003 to 2013, meaning that budget break-even points – the oil price at which Gulf governments do not spend more than they receive – slowly rose across the decade. Gulf governments presided over major expansions in public sector employment and wages, as well as eye-catching megaprojects. That is why HSBC’s economist Simon Williams says that “the excesses of the past 10 years have to be reversed”.
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