RIYADH, 19 November 2004 — Shoura Council members, businessmen and senior executives in the Kingdom have welcomed the move to impose value added tax (VAT) on goods and services with a note of caution that it would be a bit complicated to administer this new taxation system and collect it in the Gulf states, which follow different taxation mechanisms. The imposition of VAT will also jack up the prices of products because the cost of goods would include this in-built tax.

“The VAT has been widely adopted by advanced economies and it would be in the economic interest of the Kingdom to levy this tax”, said a prominent economist Ihsan Bu Hulaiga, who is also a member of the Shoura Council, here Wednesday.

Bu Hulaiga said that “this form of tax is used by many other industrialized countries currently, but it will take time for the Gulf states to impose the VAT system because of the differences of taxation system and the cost of compliance.

He said that “VAT is a general consumption tax assessed on the value added to goods and services”. It is a general tax that applies, in principle, to all commercial activities involving the production and distribution of goods and the provision of services, he explained. It will be indeed a difficult task to make a final strategy as how to impose VAT and which products are selected first to levy this tax. The imposition can also prompt some local manufacturers to seek exemption for certain products from the proposed value-added tax system.

This issue, which will affect the end-consumers in all cases, is now being widely debated in the six-nation Gulf Cooperation Council (GCC) following the meeting of the GCC finance ministers last month, who approved a proposal to impose VAT, while deferring a final decision to the heads of GCC states. The finance ministers, however, have asked the GCC General Secretariat to prepare a comprehensive study for imposing this tax by 2007. No details, however, have been made available about the products, which will be affected initially under the proposed tax.

Referring to the benefits of adopting VAT, local businessmen said that VAT will be better for collecting revenue than the ad valorem duty. The Gulf states, they argue, can also learn from the European experience in which every member state has a VAT. But, it is very convenient for consumers — which means that individuals could purchase goods and pay VAT on the goods in a member state other than their own (i.e., at origin). They could then return to their home member state (destination) with their purchases without paying any more VAT.

“VAT in the Kingdom must be minimum at the very outset”, said Saleh Al-Musallam, a Saudi businessman. Al-Musallam pointed out that tobacco and luxury products may be targeted in the first phase to be taxed under the new system. He said that the Kingdom has been encouraged also by the International Monetary Fund (IMF) to impose VAT. In fact, Riyadh has since then introduced excise duties on selected consumer goods, which offset some of the losses in revenue due to the establishment of a GCC Customs Union.

He said that “tobacco should be made costlier with high VAT imposed on it in the Kingdom and the Gulf states because it is injurious for public health”. “But the question remains as what modus operandi will be adopted in the Gulf countries to introduce VAT system and which sectors, or for that matter, which products will be under the new VAT taxation system first”, said S. M. I. Hassan, country manager of LIC (International), an insurance company. Hassan said that “we can not assess the impact of VAT on sectors like insurance unless details of the proposal of the GCC finance ministers are not available”.