The introduction of VAT in Oman could impact businesses already struggling to deal with the twin economic shocks of a global pandemic and volatile oil prices, according to Jeanine Daou, PwC Middle East’s indirect tax leader.
Cash-strapped Oman has revealed plans to introduce a five percent value-added tax in April next year, following the lead of Gulf neighbours.
Introduction of VAT to give Oman’s economy $780m boost
Introduction of VAT early in 2021 could be coming at the best possible time as Sultanate battles economic impacts of Covid-19 and low oil prices
Daou told Arabian Business the brunt of the tax will be borne by consumers, who may find certain products simply outside of their budgets.
She said: “It’s possible that the addition of VAT on certain elastic goods and services may result in decreased consumer demand, which in turn could impact some businesses.”
Essential food items, medical care, education and financial services will be exempt from the planned levy, according to a royal decree detailing the tax on Monday.
Daou added: “These goods and services will be VAT exempt, zero-rated or outside the scope of VAT, and are included to ensure that basic commodities are not taxed extensively.”
Oman, the biggest oil exporter outside OPEC, was among the more vulnerable economies in the six-nation Gulf Cooperation
Council even before it was lashed by falling crude prices and the coronavirus pandemic.
The United Arab Emirates and Saudi Arabia, also hard-hit by the drop in oil prices, imposed a five percent VAT in 2018. Saudi Arabia tripled its tax this year.
Daou believed the impending introduction of VAT in the sultanate will help to steady the financial ship in the country.
“The introduction of a stable non-hydrocarbon revenue source will contribute to bridging Oman’s deficit and will likely be seen as a positive step by external bodies and credit rating agencies,” she said.
Oman’s sovereign rating was cut for a second time this year at the end of June by Moody’s Investors Service, which forecast a lower crude price environment will likely slash the Gulf nation’s oil revenue.
The rating company downgraded the sovereign a notch lower to Ba3 – three levels into its non-investment grade scale, and changed its outlook to negative. In March, Moody’s put Oman on review for the downgrade, saying the country’s low fiscal strength will likely place pressure on its finances.
Since the start of the year, Oman’s Ministry of Finance has issued several circulars and various directives to government units to curtail spending – in April, the MoF announced a cut of OR500 million ($1.3bn) in the state budget.
Oman, ruled by Haitham bin Tariq also cut the salaries of new government employees.
Oman – together with the other five states of the Gulf – agreed to introduce VAT in 2018, although it later delayed its implementation to 2019. That was delayed further to 2021 amid sluggish economic performance 12 months ago.
Daou remained cautious about any suggestions Oman could quickly follow the example of Saudi Arabia in hiking up its tax level.
She said: “The GCC VAT Framework Agreement, which sets out the broad principles of VAT for the GCC member states, stipulates that member states, including Oman, must implement an initial standard VAT rate of five percent.
“By global standards, five percent is one of the lowest VAT rates implemented in other countries and we have seen KSA recently increasing the rate to 15 percent effective 1 July 2020. Whilst an increase in rate clearly aims at generating additional revenue, countries will need to assess the timing in the light of its potential impact on the economy.”
With Bloomberg