An Al Masah Capital Management Analyst Weighs in on the Likely Effects of the New GCC VAT

The members of the Gulf Cooperation Council (GCC) agreed in 2017 to the recent imposition of a value added tax (VAT) across the region. While this tax aims to raise much needed revenue that will allow member nations to achieve important goals, many have wondered about its broader economic implications.

A recent report in the Khaleej Times feature some analysis from an Al Masah Capital Management advisor that many will find illuminating. While the exact effects of the new VAT remain to be assessed, most such experts are predicting that at least some inflation will follow.

A New Era for GCC Taxation Norms

Employment markets across the GCC have been sluggish in recent years, with many consumers feeling the pressure in their household budgets. At the same time, the governments of member nations have been spending a bit less generously themselves than in the past, particularly insofar as lower petroleum prices have held their own revenues down.

The new VAT is designed to help address this latter problem a bit by providing governments across the region with another source of income. The more diversified revenue streams that result should eventually allow them to craft their budgets more freely and to use the increased leeway that results in the service of more effective economic stewardship.

A Likely Reduction in Spending Power for Consumers

In the meantime, it will probably be consumers who feel the effects of the new VAT most keenly. Like similar taxes that have been enacted all over the world, the new GCC tariff kicks in wherever value is added at any stage of an economic process. From manufacturers who transform labor and capital into pricier goods to retailers who do the same with their sales, a VAT will be assessed on every such addition of value.

As a result, most economists expect that at least some amount of inflation will be added to economies all across the region. Although the majority of analysts expect the effect to be modest, consumers will likely feel the effects on their household budgets. With prices rising slightly all across the board, consumers who are already grappling with soft labor markets will probably have some adjustments to make in the near future.