VAT in the Gulf Cooperation Council
Edited by Ehtisham Ahmad and Abdulrazak Al Faris
Satya Poddar and Jayanta Kalita Financial services have been exempted from tax under the value added tax systems around the world. The VAT exemption is not on any social or economic rationale but on account of the conceptual and administrative difficulties associated with measuring the value of financial services. This is because there is no explicit consideration for the traditional financial intermediation services of deposits and loans. The consideration for these services lies in the spread between the interest charged on loans and that paid on deposits. This margin is a global composite measure of intermediation services rendered by the bank to both depositors and borrowers, and cannot be readily measured for individual transactions for purposes of applying a VAT, or any other form of transaction-based consumption tax. It has been difficult to develop a methodology for allocating this margin to individual transactions for purposes of applying a VAT under an invoice-based method. Similar issues arise in the taxation of insurance and other types of financial intermediation services, for example, currency exchange and trading in securities. Under an exemption system for VAT, typically under the older VAT systems, no tax is applied to goods and services exempted from tax, but no input credit is allowed for the tax paid on inputs acquired for providing those exempted supplies. This blockage of input taxes gives rise to cascading of tax, competitive distortions, and economic non-neutralities. It creates a bias in favor of self-supply of inputs. It results in a tax penalty on...
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