Introduction

A survey of the global indirect tax landscape reveals that over 160 countries across the world apply a form of consumptive tax based on the principles of value addition at different levels of the supply chain and commonly referred to as the Value Added Tax (‘VAT’) or the Goods and Services Tax (‘GST’). While Australia, Canada and the European Union have had a robust system of GST/ VAT since quite some time, new entrants to GST like Malaysia have faced diverse issues in implementation. In this background, the impending introduction of VAT in the Gulf Cooperation Council (‘GCC’) and GST in India assume significance. 

The GCC is a regional inter-governmental political and economic union comprising of the member states of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. Traditionally, the GCC member nations have been considered as tax havens for business houses on account of imposition of fewer or no taxes. Currently, trade taxes (custom duties) are a significant contributor to the non-oil revenue base, and plans are now well developed for the introduction of a GCC VAT expected to go live from January 2018.

On the other hand, India has had one of the most complex indirect tax systems in the world with several layers of central, state, and local taxes that may apply to the same transaction. Post the passage of the GST constitutional amendment bill in September 2016, India has taken important steps to replace its indirect tax system with a new dual state and federal GST system. With the Indian parliament approving the bills introducing GST in April 2017, it is expected that the Indian states will follow soon paving the way for GST rollout by July 1, 2017.

GCC VAT and Indian GST 

While it has been reported that the GCC VAT Framework has been signed by the 6 member states, the same is not available publicly. However, there is a wealth of literature on various aspects and expected contours of the proposed VAT Framework which is available in the public domain. 

Further, there are clear indications that the GCC VAT’s structure and framework would bear resemblance and would be in sync with VAT/GST framework prevalent in other jurisdictions across the world. Given the significant interest and investment that Indian companies have in the middle-east/GCC market, this warrants a comparison of the key aspects of the expected GCC VAT Framework and the Indian GST law which has been provided in the succeeding paragraphs:-

• ‘Supply’ as the taxable event – Both the GCC VAT and the Indian GST will levy tax on the supply of any goods and/or services. Accordingly, common principles for interpretation of the concept of ‘supply’ like transfer of ownership of goods, provision of service, barter, exchange, etc. need to be carefully analysed to identify the relevant transactions that shall be subject to VAT/ GST.

• Free Supplies – Under the GCC VAT, tax would be levied on all supplies of goods and services without consideration except gifts and samples of insignificant value. In this regard, the Indian GST differs slightly and provides that free supplies only between related entities or different registrations of the same legal entity would be leviable to GST. 

However, readers may remember that the first draft of the Indian Model GST law too had sought to levy GST on free supplies in the course of business – this was later amended to restrict applicability of GST only between related entities or different registrations of the same legal entity, given the strong criticism this provision faced from the industry. This could be thus be a point of advocacy for businesses based in the GCC to represent to the authorities for suitable exceptions qua VAT on free supplies. 

• Place of Supply modalities – Since the GCC is a union of different member nations, the GCC VAT is likely to provide different rules for ascertainment of place of supply for:-

− Supplies within a single member state  

− Supplies between different member states. Further, different treatment is likely to be meted out to registered and not registered customers based in another member state. 

− Supplies outside the GCC member states. 

The above differential treatment for different supplies is also discernible in the scheme of Indian GST law, albeit in the context of different Indian states. In other words, the Indian GST has different place of supply provisions for supplies within a state, interstate supplies and exports and to that extent similar complexities may arise.  However, the thumb rule in both India GST and GCC VAT is to levy the tax at the destination/place of consumption which is usually pegged with the location of the recipient of the ‘supply’ in question.

• Valuation – Under the GCC VAT, the value of supply would be the consideration exclusive of tax and the non-cash portion of the consideration would be determined basis fair market value. Similarly, the Indian GST law mandates that the transaction value should be the taxable base for GST and the draft Valuation Rules rely on the concept of ‘open market value’ (similar to fair market value concept) to arrive at the taxable base under GST.

• ‘VAT Grouping’ – In line with international VAT/GST statutes, it is expected that the GCC member nations may implement ‘VAT grouping’ where-under legal entities belonging to a single group in a member state would be construed to be one taxable person and supplies between such entities would not be leviable to VAT. 

Unfortunately, in the Indian GST, there is no similar concept of grouping apropos different group companies as under GCC VAT. Indian GST creates exceptions only for transactions between different branches in a single state and under a single registration which will not be leviable to GST – even the hitherto available option of centralized registration under service tax is expected to be done away with under GST. Grouping, if adopted in India, would have been an extremely convenient option for GST compliance given that several large industrial groups in India are faced with a manifold increase in compliance costs under GST. Indian businesses ought to take a leaf out of GCC VAT in this regard and should engage in advocacy efforts with the government to introduce a similar idea in India too. 

On a perusal of the above points it appears that the fundamental concepts of destination-based-consumption-taxes are common for both the GCC VAT and the Indian GST law. Further, Information Technology related, transitional and contractual issues faced by businesses under both GCC VAT and India will be similar. Given the similarities between the GCC VAT and the Indian GST law, it would be beneficial for both the regimes to engage in knowledge/experience/best practices sharing in order to learn from one another. 

Impact on Indian businesses

One of the main pillars of the GCC’s competitiveness and strong appeal to Indian investors is it’s ‘tax free’ business-friendly environment. The introduction of VAT, prima facie, may seem to increase the cost of doing business and compliance. 

However, it would be worthwhile to note that standard VAT rate at 5% in the GCC would be one of the lowest vis-a-vis standard rates of VAT/GST in other jurisdictions like Singapore (7%), Malaysia (6%), India (18%), etc. Further, in the current environment, companies are looking for more than mere tax-free destinations to establish their businesses. Economic and political stability, infrastructure, geographical location are key factors and GCC ranks particularly high on this index. Further, it is likely that GCC member nations may incentivize specific sectors like financial services, education, healthcare, food etc. with exemptions/’zero rating’ or prescribe a higher threshold to trigger VAT obligations, than what is seen in India, in order to maintain their position as a business friendly destination. 

Accordingly, it would be worthwhile for Indian businesses interested in GCC to keep a close watch on the GCC VAT developments. 

The UAE Government’s recently initiated VAT awareness workshops program, recent Budget as passed by Saudi Arabia and statements made by Governmental authorities in Kuwait affirming VAT implementation by early 2018, buttress the evidence that VAT will be a reality in all the GCC countries latest by end of 2018/mid-2019. 

Conclusions

Indian businesses situated/interested in the GCC need to be cognizant of VAT introduction and should conduct an impact assessment of the effects of VAT implementation on their businesses and contracts. An impact assessment would help the businesses identify the nature of their supplies and related consequence on deposit of tax and credit availment. Further, care must be given to understand the treatment of supplies of goods or services without consideration like free supplies, goods or services used by company’s employees for their personal use, gifts, etc. 

Similarly, determination of person liable to pay VAT on intra GCC transactions, VAT applicability on supply of goods to and from Free Trade Zones (like Ras Al Khaimah Free Trade Zone in UAE – conceptually similar to Special Economic Zones in India), treatment of discounts, imports, required amendments to contracts (cost side and revenue side) etc. need to be analyzed to ensure that the business operations are not negatively impacted owing to introduction of VAT.