The Kuwaiti government may be set to approved a controversial new tax on expat remittances, in a move which has led to speculation other Gulf states could follow suit.

A draft law approved by the country’s financial and economic affairs committee will now go before the National Assembly for approval. It would impose a tax of 1 per cent on transfers made by foreign workers of up to KD99 (US$330), with a sliding scale of taxes up to 5 per cent for remittances of KD500 (around US$1,680) or more.

The move has already divided politicians and commentators in the country, and it is not certain it will be formally approved. But it is seen as significant as it would represent the first outright remittance tax in the GCC and could open the door to other countries to follow suit.

Kuwait is one of the largest sources of expat remittances in the world, with around US$60bn sent out of the country in the last five years, according to the finance and economic affairs committee. India and Egypt are the largest recipients of the cash.

Bahraini lawmakers have proposed a remittance tax, while Saudi Arabia instead imposes an expat levy, and the subject is periodically discussed in other regional economies as a way to reduce reliance on expats and raise revenue.

A tax on remittances is seen as a way to diversify Kuwait’s economy and reduce reliance on the oil industry. But fears have been raised that expat talent may be deterred, or that money transfers may shift to the black market. Critics have also pointed to a lack of clarity over what constitutes a remittance.

Remittances are said to have increased heavily in recent weeks as workers make transfers in anticipation of the new tax; the government has said black market transfers could lead to jail sentences and heavy fines.

Kuwait’s legislative committee had previously opposed the tax on constitutional grounds, and Al-Hamidi Al-Subai’e, head of the committee, led criticism this week. According to the Arab Times, he was reported as saying: “The government needs to find a comprehensive solution. I do not think levying the remittances of expatriates will have an effect, especially since we are still discussing the constitutionality of the proposal.” He called for further studies into the detail of the legislation and its likely effects.

But other lawmakers were more supportive of the proposals, claiming the effects on expat wealth would be minimal and outweighed by the revenue raised for the state. Khalil Al-Saleh, chair of the replacement and employment crisis committee, said the level of tax was “not a big amount” and added: “Kuwait has embraced expatriates for decades. However, such foreign remittances must be curbed because the massive amounts transferred outside the country have a direct impact on the country’s economy. It is unreasonable for the government and Parliament to stand idle and watch Kuwait’s money being pulled out of the country.”

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