Gulf states say goodbye to tax-free reputation

The United Arab Emirates' "sin tax", doubling the price of tobacco and increasing soft drink prices by 50 percent, comes into effect on Sunday, ahead of the more general VAT on goods and services from January 1.

Oil-rich Gulf states, hard hit by a drop in petrodollar income, will next year introduce value-added tax to a region long known for being tax-free.

The UAE is one of the six Gulf Cooperation Council states to have agreed to introduce VAT at five percent next year as they seek to revitalise their economies.

The UAE and Saudi Arabia have said they will implement VAT from January 1, 2018, while the other GCC states of Bahrain, Kuwait, Oman and Qatar are expected to follow suit during the year.

Some have hailed introducing VAT as the start of "exciting, dramatic" change in the region, but the measure is also expected to push prices up for all residents including citizens and low-income workers.

Economies in the Gulf - home to the world's biggest exporters of oil and liquefied natural gas - took a major hit after a global oversupply triggered a drop in prices in 2014.

Their balance sheets have remained in the red despite government austerity measures recommended by the International Monetary Fund, including freezing wages, benefits and state-funded projects, cutting subsidies and raising power and fuel prices.

Governments across the region have also drawn hundreds of billions of dollars from their massive sovereign wealth resources in an attempt to curb the deficit.

Dramatic changes

The six states are now taking austerity measures a step further with the plan to introduce VAT, ending their decades-old reputation for being tax havens.

Accounting and consultancy firm Deloitte has said the progressive implementation of VAT from next year "marks the start of some of the most exciting, dramatic and far-reaching socio-economic changes in the region since the discovery of oil" more than half a century ago.

But the move is expected to increase prices across the board including for nationals, who make up roughly half of the GCC's overall population of 50 million.

Gulf nationals have for decades benefited from a generous cradle-to-grave welfare system, and have largely been spared by austerity measures so far.

"Citizens won't be happy about the price hikes from the VAT. I don't think it will be acceptable as it will affect people's budgets," said Khaled Mohammed, a Saudi working in Dubai's property sector.

Fears of corruption have also been expressed.

Leading Kuwaiti economist Jassem al-Saadun said governments will need more than numbers to ensure a successful introduction of VAT.

"People must be convinced that there is social justice, that raised funds will be used for development projects and that corruption is checked," the head of Al-Shall Consulting told AFP.

"None of these factors is guaranteed."