IslamicFinance.de

According to Fitch Ratings, the plan to introduce Value Added Tax (VAT) in Gulf Cooperation Council (GCC) member states could be a key test for the region's Islamic finance industry. Saudi Arabia and Bahrain approved the implementation of VAT in the GCC, however, local implementation laws must still be agreed in each country. This paves the way for the introduction of an expected 5% VAT rate as early as the beginning of 2018. Without tax neutrality or equality rules, the introduction of VAT would put Islamic finance transactions at a disadvantage to conventional transactions. A VAT charge adds to the instalment payments in a murabaha, while a conventional transaction would not have VAT for the sale of the asset added to the interest payments. Numerous countries with VAT have provided for some form of tax neutrality or equality for Islamic finance transactions, including Malaysia, Indonesia, Turkey and Pakistan.