IT channel cautiously upbeat about proposed GCC VAT introduction
Regional IT sector is hoping the introduction of VAT in 2018 will promote financial transparency
In the wake of the Gulf Cooperation Council (GCC) countries agreeing to introduce value added tax (VAT) at a rate of 5% in 2018, the regional IT industry has reacted to the tentative tax policy with cautious optimism.
Although the decision is yet to receive final approval before being implemented, the tentative policy for the tax implementation has already been approved by leaders of the GCC countries comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates.
While GCC countries are still hammering out final details of implementing VAT in the regional bloc, they have agreed that the tax will not be applied on certain industries like education and health care.
For IT companies [vendors, distributors, resellers and systems integrators] providing hardware, software and IT services to this market, time to start preparing and assessing the broader impact the introduction of VAT will have on their businesses is now.
Ranjit Rajan, associate vice president, Consulting at IDC Middle East and Africa, said the introduction of VAT will have a wider impact on both IT suppliers and consumers in the GCC. Rajan added that VAT is a consumption tax that is ultimately borne by the final consumer. "It is an indirect tax that is collected by the seller or supplier and paid to the relevant authorities," he said.
Rajan pointed out that although the coverage of the tax and roll out plans are still murky, IT goods and services could come under its ambit. "It appears that the proposal is to initially introduce a low rate of about 5%. However, the introduction of any tax at all will be a significant change in the GCC and there could be financial, technical, commercial and practical implications for the IT industry as a whole," he noted.
Rajan said the IT channel will have to decide whether it will pass on the cost to the end user customer, or absorb some of it therefore decreasing margins that distributors and resellers earn. "This will have to be carefully assessed in the context of global competitiveness, as raising the costs too much may mean increased competition from other regions in the world," he said.
Vasant Menghani, founder and CEO at Dubai-based Touchmate, a maker of mobile devices and IT accessories, agreed and said, while the motivation to introduce VAT in the GCC is a rational one, the downside is that the tax will take away the very appeal that has made this bloc to grow much faster than other regions in the broader Middle East. "If you take the UAE and in particular Dubai, it's the shopping destination for many holiday and business tourists from Europe, Asia and Africa that come to buy consumer electronics and IT products here because of the low customs duty imposed on these products," he said. "In fact, at present, some of the IT products, consumer electronics, telecommunication products, PCs, printers, components and IT accessories sold in the market are exempted from paying customs duty to Dubai Customs."
Menghani said the fact that the GCC is known to be a tax free coalition is in itself a positive especially for the IT industry. He added that on a positive note, the introduction of VAT will make the IT sector much more transparent from an accounting and auditing of books perspective. "I have no doubt in my mind that it [VAT] will bring accountability to the whole IT industry," he added. "From vendor, IT distributor and channel partner, they will all be required to account for the VAT based on the sell-out of IT goods and services that will fall under this tax regime.
Dharmendra Sawlani, general secretary, Dubai Computer Group (DCG), concurred and pointed out that although human nature is such that no one likes to pay taxes, VAT introduction in the GCC will help in bringing about transparency and accountability to the IT industry. "The cons of having VAT on IT products are also there. Dubai has historically been known as a shopping destination for tourists and VAT will surely have a negative impact on that. I feel spending on IT will take a hit if consumers and businesses have to pay more for the same product and services," Sawlani remarked.