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Taxation in the GCC by way of excise and VAT is a rapidly evolving topic. We have been looking at it through various lenses over the last couple of months. Having sieved through the executive regulation, federal laws and a whole bunch of policy papers, it became clear to me that there was a need to raise knowledge levels on taxes which admittedly included drab and complex sounding terminology such as ‘designated zones’, ‘reverse charging’ or ‘place of supply’.

Having spoken to several soft drinks players over the past year, it is clear that there are a number of questions that needs our attention. For example, how do comparable implementations of taxation worldwide look like? The case for implementing excise or selective taxes on sugar sweetened beverages by and large have the intended effect of reducing non communicable diseases (NCDs) and obesity. Did the net calorific and volume declines of the targeted categories match up to expectations? Did it include many categories as was the case in Mexico back in 2014 or just a few?  Was it easy for governments to administer taxation and monitor taxable agents effectively or were there cases when loopholes rendered the system ineffective?

All valid questions by their own virtue but the conclusion that I have come to is that answering the question of ‘why’ is the most simplest in this equation. Government intervention, it seems to me in any market is a simple three pronged approach of regulation, information dissemination and pricing instruments but oftentimes is a hybrid of all three. Ultimately and undeniably, it is a means of gaining revenue alongside reducing incidents of NCDs and the devastating toll of obesity.

With non-oil economic activity slowing down in the GCC, there has been a downward pressure on profitability and weakened asset quality due to a now more cautious financial environment.  As such, a sustained macroeconomic policy is being chased that underscores diversification and reduces fiscal vulnerabilities. It was previously thought that the presence of VAT lessens the need to introduce more excises. However, the selective excise taxes on sugary drinks, energy drinks and tobacco has the added impact of countering the health risk posed by perceivably unhealthy products.  Therefore, selected taxes were recommended on tobacco and energy drinks, at 100%, and at 50% for carbonates and sugary drinks. The selective tax forms an integral part of a new fiscal direction being implemented in the GCC – alongside VAT and a possible corporate tax in the future. Margins as it were, will depend on consumption patterns and the degree of diversification of product portfolio of the specific manufacturer or distributor.

There is a need is to tap further into the conversation, particularly on the scope of taxation, tax rate and on both its short term and long term impact.

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