Introduction
For the first time, the Gulf Cooperation Council (GCC) countries are introducing Value Added Tax (VAT).
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(Photo by Waka)
Saudi Arabia has already published the Draft VAT law in the continuing economic reforms. The VAT will be effective from January 1st 2018. “Sin” tax which in most cases is domestic excise duty on luxury goods and services will also be introduced. However, no income tax or wealth tax will be introduced.
VAT in GCC countries
The other countries set to introduce VAT and “sin” tax are GCC member countries of Qatar, Kuwait, Oman, UAE and Bahrain. This was agreed in 2016 by the Supreme GCC Council. However, unlike in Kenya where the standard VAT rate is 16 %, the rate in Saudi Arabia has been proposed at 5 %. This will be a harmonized tax rate across the six GCC countries.
What does this mean for the GCC residents? Introduction of VAT has far-reaching consequences for the GCC residents. The prices will increase by the 5 % VAT plus any other increase from the “sin” tax on the goods and services that are subject to the taxes introduced.
The price increase will result in a higher cost of living across the six GCC countries. In case the VAT introduction is not simultaneous, there may be instances of smuggling across the borders and competition across the countries. However, the good news is that for the time being, the residents will not share their income and wealth with the government.
Why VAT?
But why is the region introducing VAT? Saudi Minister of Finance Ibrahim Al-Asaaf was quoted explaining that VAT has the following benefits:
- Will be a source of revenue for the government;
- Easier to administer;
- Not easy to evade;
- It is supported by the people.
This means that the revenues from oil-rich countries which is the main export commodity from the GCC countries is dwindling and this has necessitated the regional governments to seek ways to raise revenue. The GCC countries are likely to introduce other taxes such as income tax soon.
Effect on Kenya taxpayers
For the Kenyan and other East African taxpayers, the implication of the introduction of VAT in the GCC countries is in four key areas:
- Cost of living in GCC countries;
- Imports;
- Cash remitted back home;
- Potential jobs.
Cost of living in GCC countries
Many Kenyans and East Africans are living and working in GCC countries. With the price of the goods and services that will be subject to VAT and the “sin” tax, the cost of living will also increase in all the GCC countries. This is against the already contracted salaries which may not be revised immediately.
Imports
There are many imports by Kenyans and East Africans from the GCC countries. The imports are for such goods as second-hand vehicles and dates and commodities such as oil. With the introduction of VAT, the prices of goods and services will increase. Therefore, Kenyan and East African importers will pay 5 % more for all imports from GCC countries unless they can claim back the VAT.
Cash remitted back home
Many Kenyans and East Africans work in GCC countries. Each month, they remit part of their salaries back home to support their families, like savings or purchase of assets. With the introduction of VAT and the “sin” tax followed by the price increase, the workers will be left with less money. Hence, the amount of money remitted back home will decrease at the country and regional and country levels.
Potential jobs
Kenyans and East Africans are looking for jobs internationally. Before one accepts a job, they weigh it against the cost of living in that country. The introduction of VAT and “sin” tax in the GCC will result in increased prices of goods and services across the region and the resultant high cost of living. Therefore, any Kenyan and East African seeking employment in the GCC countries will have to consider the tax implications on their potential salary.
Hence, the previous attractive salaries may no longer be as attractive unless the salaries will be increased. Therefore, some Kenyans and East Africans may not travel to work in the GCC countries in the future unless the salaries are competitive to mitigate the increased cost of living.
Therefore, the introduction of VAT and any other tax in Saudi Arabia and other GCC countries has implications for Kenyans and other East African residents. This will result in decreased VAT and income tax in Kenya no matter how minimal. The increase in the prices of goods and services due to VAT and “sin” tax in the GCC countries will have a spill-over effect on East Africa.
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Disclaimer
This post is for general overview and guidance and does not in any way amount to professional advice. Consequently, www.taxkenya.com, its owner or associates do not take any responsibility for results of any action taken on the basis of the information in this post or for any errors or omissions. Kenyan taxpayers must always rely on the most current information from KRA. Tax industry in Kenya is very dynamic.
©Wakaguyu Wa Kiburi
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