The Impacts of the Application of VAT in Kuwait and the GCC Countries

For a long period of time, tax and taxes have not been an oftenly used regarding Kuwait and other Gulf countries like Bahrain, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. A value-added tax refers to the levy that the tax authorities pick at every stage in commodity distribution chain. The taxes are on every value that the distributors add in every level thus the name value added tax. The introduction of VAT in these Arab regions have been coming across opportunities as the Arabs remains suspicious about the value added tax application throughout these areas. They see it as a plan to deprive the investors the benefits they enjoy from the high price of the oil. They argue that the government just creates an avenue through which they take the investors’ money for no good reason. The implementation of the tax policy in the United Arabs States will take place in January 2018, and the business has different perceptions about the effects of the introduction of the system in the business environment and the investments. Vat is an avenue through which the government focuses on the creation revenue for them to use in the creation of the facilities that serve the demand for the people.

VAT is a tax system which focuses on levying the consumption of goods and services in the regions where it is implemented. The tax authority of a country usually set the tax rate in the form of the percentage of the total sales of the commodities. The Value added tax is expected to be at the rate of 5% in the Kuwait and Arabs nations. Though the countries’ citizens have a negative perception about the Value added tax level, it appears to be the lowest rate compared to other countries that have the policy in place. For instance, some countries such as Australia have a value-added tax rate of approximately 20% (Kevin 4). The opponents of the VAT tax argue that the system will lead to the increase in price thus reducing the consumption rate. Additionally, the countries have been enjoying high salaries and wages due to the higher costs experienced in the country. However, the proponents present the positive effects of the introduction of the tax system in the states. For example, they see it as a way through which the government collects money and distribute it to the other people. The purpose of this paper is to examine the VAT systems, implementation, and its effects on Kuwait and the GCC nations.

The implementation of VAT Kuwait and the GCC countries

There is a continuous interaction among the authorities, and the government officials plan for the implementation of the VAT tax system in the area. The driving motive for the implementation of the policy is to divine a mechanism that will close the existing gap in the budget deficit. This argument indicates that the low oil prices in Kuwait and the GCC countries are responsible for the budget deficit experienced in these countries. Therefore, the authorities have the perception that they can close the gap through the application of this policy. As an agreement to close this gap, the nations have reached a consensus to introduce a VAT rate of 5% at the beginning of the year 2018 (Torchia 6). The approach is perceived to have a positive impact on the governments that have heavily relied on revenue from the oil prices. The introduction of the VAT will create an alternative source of the income thus making it possible for the government to create diversification in the source of income. The introduction of the VAT tax system has to generate the difference between the value-added tax and the sales tax.

Upon the explanation of the VAT tax policy, all the member countries agreed on the implementation of the policy in their tax system. The six nations that support the plan signed a Vat framework treaty. This document presents the guidance for the domestic regulation of the tax system. The countries should not violate the stipulated principles which act as the guide for the implementation of the policy. However, there exist rules that allow the particular countries to manipulate the laws about the supplies. Regarding the timing for the enacting of the plan, the states expect to enact the policy during the first quarter of the year 2018. However, the countries have the opportunity to choose the appropriate time for them to implement this strategy. The Vat treaty framework suggests that all the goods and services that lie to the general VAT framework will be in a position to experience a Vat tax rate of 5% unless they are subject to the exemption or zero tax rate (.Barrell et al. 22). However, the member countries have the opportunity to choose among its suppliers and decide the commodities to include in the VAT tax system. If the product remains prone to the tax system, the tax jurisdiction should collect levy from all the players in the chain of distribution of that commodity.

The sales tax system passes the burden of the levy to the retailers who are usually final in the supply chain. The end consumer of the commodity experiences the tax burden as they pay it through the price of the commodities. The manufacturers issue the sellers with tax certificates indicating the level of taxation. The issuance of the certificate acts as evidence that the levy will be collected at the final sell point. The jurisdiction is always not in a position to collect the tax revenue until the product reaches the final consumer. However, Kuwait and the GCC countries focus on the VAT tax system. In this case, the collection of the levy happens in all the stages at which the products go through. The suppliers, manufacturers, wholesalers, and the retailers experience the burden of the tax. The regulation of the implementation of the VAT requires the businesses to document all the tax collected from the sale of taxable products. In this case, the regulation obliges the tax jurisdiction to collect tax revenue throughout the stages which it passes.

Challenges faced by Kuwait and the GCC countries in implementing the VAT tax system

The policy poses both administrative and technical problems to the authorities as it requires well-stipulated outlines to avoid unexpected consequences of the plan. For instance, the member states expect the country to implement well-stipulated regulations that act as the guidance for the tax system. The rules will help the countries in the application of the VAT policy as they can determine the types of businesses subject to the taxation policy and the commodities that should be exempt from the administration. The companies need to be registered and form a monitoring system which will oversee the functioning of the society. Additionally, there are the expectations that the introduction of the VAT tax system will affect the economy adversely. For instance, there will be a sluggish growth in the economy as there shall be the reduction in the rate of consumption due to increased price levels.

The experts prospect that the implementation of the policy will rely heavily on the speed at which the nation’s civil service performs their duties. Consequently, there is the perception that Kuwait will lag behind when it comes to enacting the Vat policy (Keen 1894). The nation’s civil system is too slow, and the experts have the view that the workers will be lazy in implementing the policy (Chi-Chur et al. 436). The governing system of the country takes a long time in achieving they have to seek advice from all the other authorities. For instance, the parliament of the nations is relatively independent, and it may attempt to take part in the decision-making process for the implementation of this policy. If this happens, the management will have to make the time longer in planning for the implementation of the system. The effect of the decision-making process is that the consultations will take long as the involved parties usually have conflicting ideas. Consequently, Kuwait has not been in a position to announce the exact date for the implementation of the VAT tax system.

The effects of the VAT tax on Kuwait and the GCC economy

The business people and the citizens have a different perception on the manner in which the introduction of the VAT tax system will affect the country’s economy. In most cases, the opponents see it as having adverse effects on the economy of the nation. The current state of Kuwait’s economy shows that there is the probability that the country will experience a budget deficit in the next five years. Approximately, unless the nation seeks an alternative source of government revenue, it will suffer a deficit of US$350 billion in the future (.Francesco 76). The experts arrived at this conclusion upon the expectation of the price at the level of the oil price at the cost of $56 per oil barrel (Kevin 4). The hope compels the government to find an alternative solution to close the budget deficit. If it fails to adopt such policies, it will have to engage in borrowing thus worsening the economic situation. Consequently, the VAT tax policy appears to be the alternative solution to the problem. The positive effects of the introduction of VAT policy in other countries such as Europe and Asia guarantee the GCC countries of experiencing a positive impact on the economy. The approximation is that the implementation of the VAT at the rate of 5% in the GCC countries will lead to 1.5% increase in the country’s GDP (Boeters 2166).

The understanding of the VAT system requires the knowledge of the essential players in the system. The government acts as the recipient of the revenue. In this case, the government is always the beneficiary of the VAT revenue collected from the sale of the commodities subject to this tax policy (.Jabsheh et al. 156; Naz 56). Secondly; the stakeholders include the VAT experts who provide the necessary information to the other players in the system. For instance, the businesses categorized as the tax collectors to have adequate information regarding the rules and the principles required for the implementation of the policy. Finally, the consumers are the taxpayers as they are the last of the VAT stakeholders. Each of the players in the system experience different impacts from the VAT system.

Amongst all the stakeholders in the VAT tax system, the government remains responsible for enjoying the tax benefits. However, the state contributes to the growth of the GDP through consumption of the products produced by the companies (Chemingui et al. 294). Additionally, the government is also responsible for the provision of goods and services that the private sectors are incapable of investing due to a significant amount of capital or the not profit projects. The experts predict that there shall be increased budget deficit due to the increased borrowing (Ehtisham 283). Consequently, the implementation of the policy will ensure that the government collects enough money to finance its activities. For the process to be efficient, the government should employ efficient infrastructure through which they manage and make use of the funds.

The business people appear to be the intermediaries in the VAT tax system in Kuwait. T5hey play the central role of collecting the funds from the general products (.Agarwal et al. 22). Therefore, they incur costs in and expenditures in collecting the tax revenue and depositing to the governments. However, the business corporations do not get direct incentives for compensation of the expenses they incur in the process. The companies have to improve the performance of some of their systems such as the accounting and the IT systems. Additionally, there is the need for the organizations that offer the properties in the affected industries to higher experts of how the VAT system works (Gamal et al. 226). The expenses they incur can be passed from the business people to the consumers who pay through pricing. The implementation of the policy may affect the imported products that they receive from other countries. Most of the people would think that the introduction of the plan in the Kuwait country will lead to increased prices of the imported products in situations where the exporting country has the system in place. Under such circumstances, the GCC nations have the opportunity to choose the commodities to exempt from that tax system. Additionally, the rate of taxation is too low such that it will have minimal impact on the price of the products.

The consumers are the people who experience the burden of paying for the VAT revenue. In this case, the difficulty experienced by the suppliers is passed on to the consumers through the price. The consumers decide on whether to purchase the commodity or defer the consumption of the commodity depending on the level of the cost of the products. The application of the VAT system in Kuwait and other GCC countries may not have a significant impact on the consumption behavior of the consumers. The treaty agreement of the countries signs the contract requiring the states to implement the policy at the rate of 5% (Schenk et al. 326). The tax rate is too small, and the people may confuse it with inflation which is the general increase in the price of the commodities (Baker et al. 126). Consequently, they will continue with the consumption of the products thus benefiting the economy by accruing sales revenue and government benefits used in the purchase and provision of facilities for general use. However, if the tax rate increases to more than 10%, the consumers well aware of the price increase and may resist the consumption of the oils thus affecting the economy negatively (Ally and Abdallah, 24). Therefore, when the rate of the VAT is at the lower price, it has definite implication to the economy. When it is at a higher rate, there is the likelihood that it will adversely ruin the country’s economy.

Additionally, the introduction of the VAT system in the GCC countries creates a new business opportunity where the people can invest. The business idea originates from the fact the companies have to employ the VAT experts who act as the consultants for the businesses (Keen et al. 142). Additionally, the government needs to acquire qualified human resources that monitor the operations of the system for efficiency. Some of the countries who are the members of the GCC countries have set consultation firms that educate the companies and other players on the manner in which the VAT operates. The revenues that the businesses collect add value to the GDP growth. From the consumption dimension, the experts receive payment upon the offer of an advisory service to the clients. They make use of the income they receive in the purchase of other commodities thus making increasing demand for additional local or imported products.

The effect of the implementation of the VAT policy in Kuwait on other nations

The application of the VAT policy in Kuwait will may adverse impact on other countries that are the members of the GCC and also countries that are not members of the Gulf Corporation (Humoud 769). The effect arises from the fact that there are trade connections that exist among the nations. Therefore, the change in the policy in one of the nations affects the whole system. For instance, some of the commodities consumed I Kuwait originate from Europe, Asia, and other countries who are members of the Gulf Corporation (Gengler et al. 328). The implementation of the Vat policy will affect the system negatively as it has the impact of increasing the price of the traded products. The application of the theory allows the member countries to exempt some the goods and services produced in these nations or have a zero tax rate for the commodities. However, the policies may fail to hold for a long time thus increasing the tax rate in the future.

Despite the policies that the countries have put in place, there are notable problems that may arise from the inclusion of VAT in the members of the Gulf Corporation (Muna, 12). For instance, the country may need exempting particular commodities from the states of interest. However, it may be difficult for the nation to implement the policy because the GCC members consider it as a violation of the agreement. Under such circumstances, the country will only have the opportunity to violate the requirements in favor of a particular nation. In such cases, the importing country will sell the imported products at a higher price reducing its consumption rate. If the imported commodities are taxed in the state of origin, they lead to the creation of problems to the business in the way (Nicholson 756). The laws do not allow the company to claim back the VAT. In some nations such as Germany and Europe, the VAT rate is higher than 5% with the nations experiencing around 7% to 2o% VAT levels (Lutz 102). In this case, the GCC countries may be stuck on whether to implement the policies and pass the burden to the consumers or exempt the commodities. The passing of the responsibility to the clients has the effect of reducing the consumption level of the products thus reducing the GDP growth.

Conclusions and Recommendations

The implementation of the VAT policy in Kuwait and other GCC countries will have positive effects on the countries’ economy. The rate at which they set the value-added level is too low such that it offsets the burdens that would result from setting the tax rate at higher levels. Therefore, the effects of the VAT policy affect the country depending on the set rate. If the plan is set to be too high, the burden of the consumption is passed to the consumers through the prices thus increasing the cost of the commodities. However, it will be difficult for the people to notice the effect of increased rates when the VAT is set to be too low. Under such circumstances, the clients will confuse the impact of the VAT in price with the general inflation that occurs in the country. Amongst all the stakeholders of the VAT system in the GCC nations, the business people are vulnerable to experiencing the adverse effects of the Vat system. They have to incur costs in adopting the policy as well as the employment of the VAT experts for offering guidance to the companies. The positive effects of the VAT policy guarantee the countries to implement the tax policy. However, the state should maintain the level at that lower level to avoid the adverse effects of the system on the economy.

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