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Introduce VAT, personal income tax in oil-hit GCC: IMF Chief

Estimate is that oil exporters in MENA region have lost more than $340 billion in revenues last year

The chief of the International Monetary Fund (IMF) suggests that the GCC countries need to reduce state spending and increase government revenues on the back of depressed oil prices.

Christine Lagarde, who was appointed for a second term as managing director of the IMF on February 19, said that the GCC economies have made large fiscal adjustments in the past and added that she is “confident that they can do it again.”

Lagarde, who was speaking at The First Arab Fiscal Forum in Abu Dhabi, said that the IMF estimates oil exporters in the Middle East and North Africa have lost more than $340 billion of revenues last year because of low crude prices.

This amount roughly equals 20 percent of their combined gross domestic product.

She said supply- and demand-side factors suggest the oil prices are likely to “stay low for an extended period.”

The International Energy Agency (IEA) has warned that oil prices could touch further lows in 2016 as the output glut continues to haunt the global market.

Oil has lost more than 70 per cent of its value in 18 months, with crude falling below $30 a barrel for the first time in more than a decade from as high as $115 a barrel in mid-2014.

“The size and likely persistence of this external shock means that all oil exporters will have to adjust by reducing spending and increasing revenue,” the IMF chief added.

Tax reforms

While emphasising the reforms, Lagarde asked the countries in the region to diversify their economies to lessen heavy dependency on oil and to boost non-hydrocarbon sources of revenue.

“Most GCC countries are now in a position where they can pace their adjustment over several years and thus limit the impact on growth,” she said.

She reiterated the IMF’s call to introduce new taxes and to overhaul the existing tax system, giving greater emphasis on corporate income taxes as well as property and excise taxes in the GCC states.

“Start by putting in place a simple system that initially focuses on VAT – ideally, a harmonised regional VAT,” she stressed, adding that even at a low single-digit rate, such a tax could raise up to two per cent of GDP.

Following the successful rollout of VAT, the governments can continue “to invest in building tax administration capacity that could eventually allow for introduction of personal income taxes,” Lagarde said.

Earlier this year, the members in the special grouping of Arab countries agreed on a tentative plan to introduce value-added tax (VAT) across the region in 2018.

Officials decided in January to unify their tax policies before the introduction of VAT and said they were aiming at a range between three and five per cent of the value of goods and services.