Oman recently introduced a 5 percent value-added tax (VAT), becoming the fourth Gulf Cooperation Council (GCC) nation to do so, and also the largest to freshly implement the consumption tax into its taxation system. Oman has followed the footsteps of the Kingdom of Saudi Arabia, Bahrain and the UAE. The Sultanate’s government signed the Gulf Council Cooperation (GCC) VAT Framework or the Common VAT agreement in 2017 and back then, it was decided that VAT will be introduced in 2019. However, the process was postponed and Oman decided to introduce VAT in 2021. Oman’s decision to delay the process of introducing VAT has to do with its slow economic growth. Back then, the world was dealing with unstable oil prices and a global economic slowdown. The government in Oman feared that the addition of a new tax such as VAT to its taxation system could prove to be complicated.
However, in 2020, the coronavirus pandemic battered the global economy and also oil demand took a hit. According to the International Monetary Fund (IMF), Oman’s economy contracted by 6.4 percent in 2020. In its report, IMF said that sectors such as construction, hospitality, and wholesale and retail trade sectors experienced the heaviest toll. Even inflation turned slightly negative due to contraction in demand. Oman’s fiscal deficit rose to 17.3 percent of GDP, and central government debt increased to 81 percent of GDP. Reportedly, non-hydrocarbon GDP took a hit of about 10 percent during the period. Despite the economic distress and limitations, Oman finally introduced VAT in April 2021.
By introducing VAT, the Sultanate expects to raise around $1.04 billion each year. This is equal to around 1.5 percent of gross domestic product (GDP). The introduction of VAT will also help Oman successfully fulfil Saudi Vision 2040, which aims to diversify the economy and increase revenue from non-oil sectors such as logistics, construction and tourism. Oman is in need of new revenue streams and VAT is possibly one of them.
Why Oman levied VAT?
The major reason that Oman has levied a 5 percent VAT is to add to their revenue streams. An estimated $1.04 billion is expected to be added to the government’s chest from VAT and with time, the figure is expected to increase. Similar to other GCC economies, Oman is looking to diversify its economy and reduce its dependence on oil.
The diversification ambitions of Oman are also being driven by a slump in hydrocarbon reserves and revenues. The private segment activity in the economies still depends on government-backed projects and its consumption is backed by the revenues generated from the oil and gas sector. The policymakers in the Sultanate were under immense pressure to float alternate ideas. VAT can also be considered a part of its diversification process since it adds another revenue stream for the government.
VAT is also expected to impact Oman’s development and international competitiveness in a positive manner. A timely rollout of VAT is crucial for the Sultanate to maintain investor’s confidence. S&P Global Ratings affirmed its B+/B long- and short-term foreign and local currency sovereign credit ratings on Oman and also maintained its stable outlook. Further delays or any changes whatsoever would surely inflict only more economic damage for the Sultanate.
New rules require businesses to display their VAT registration numbers on business documents. This will add to the credibility of businesses in the Sultanate. Considering the registration threshold and with proper documentation in place, businesses appear well established. Also, auditing is an integral part of any business be it in the Sultanate or any other part of the world. Now, businesses will require to ensure proper documentation for a period of at least 5 years and such documentation should be easily available upon the request of the FTA. This would lead to compliance and transparency and at the same time give shareholders the actual picture of the company’s financial condition.
Compliance and transparency mean businesses in the Sultanate will be able to attract investors, both domestic and foreign. Investors often prefer transparency as it gives them the confidence to put their money into the firm. VAT could possibly lead to an increase in foreign direct investments (FDI) into the Sultanate.
What’s taxable, what’s not
After various considerations and delays, Oman finally levied VAT in April 2021. So, the next question that arises is which products and services will be taxable and which will be exempted? A standard rate of 5 percent will be levied on most goods and services bought within the country, mostly FMCG products. There are also exceptions for products and services which include essential food items, medical care, education and financial services.
The Oman Tax Authority has revealed that 94 food items are exempted from VAT. The exempted food items include meat, fish, poultry, fresh eggs, milk, vegetables and fruits. Coffee and tea, olive oil, sugar, nutritional products for children, bread, bottled drinking water and salt are also exempted. The Sultanate has also exempted some domains like education, healthcare and financial services from VAT by adding them to the zero-list.
Besides basic food items, other categories upon which VAT is not levied include financial services, healthcare services, healthcare-associated goods, education and related goods, the supply of peer land, resale of residential buildings, local transportation and supply of residential buildings by renting. Here, it is important to note that in order to consider a supply as exempted from the VAT, the specific conditions mentioned in the Oman VAT Act and Executive Regulations needs to be met.
Some imported goods are also exempted from VAT. Imported goods which are in favor of diplomatic and consular bodies, goods imported for the armed forces such as ammunition and weapon supplies, goods included in the zero-rated list are also exempted. Personal effects and used household appliances brought to the country either by a citizen or a foreigner are also exempted from VAT.
Is Oman prepared is for VAT?
VAT is still something relatively new in the Middle East and only four nations out of the 22 in the region have introduced it. Oman is bound to face various challenges as it tries to integrate VAT into its taxation system. The very process of dealing with the new tax system could prove too chaotic in the beginning. Another problem that could arise in the beginning is that the database or filing system adopted by businesses or authorities in Oman could prove to be inefficient, after the introduction of VAT. More so in the case of businesses dealing in items that will be taxed under VAT. This could prompt tax authorities or even businesses to upgrade their filing system in accordance with VAT, which is an additional cost. Filing tax manually is not a preferred option, as it will take much greater effort and time.
There will be multiple other complications that governments and authorities in the Sultanate have to overcome. Oman can learn a lot by studying how their neighbours implemented VAT. In the UAE and Kingdom of Saudi Arabia, many local businesses initially did not have the proper filing systems. Even multinational companies operating in the Kingdom or the UAE had to alter their ERP systems when VAT was introduced. Another major problem faced by the two nations was delays and disputes with regard to pricing and invoicing. This was mainly due to their failure to print invoices on time, which often impacted their working capital.
With time, we would be able to draw parallels between the problems faced by Oman and those by the and the UAE. Of course, they won’t be identical, however, the challenges will depend on Oman’s taxation system and how responsive Omanis are to VAT. It is important to note that the Sultanate already has a corporate tax system in place and previously had no indirect taxes until the introduction of excise tax in 2019 on selective goods which are considered harmful for human consumption. Oman levying VAT means it will only expand the consumption tax base in the Sultanate to include taxation on the supply and import of all goods and services. Not so, in the case, the goods and services are zero-rated under the VAT legislation.
VAT implementation in Saudi Arabia and the UAE
Both the Kingdom of Saudi Arabia and the UAE introduced VAT during 2018, almost at the same time. Even the rate was set at 5 percent by both the Gulf nations. However, the standard VAT rate in the Kingdom of Saudi Arabia was increased by the government to 15 percent effective 1 July 2020. In the UAE, only businesses that report annual revenue of over Dh3.75 million are required to register for VAT. After the implementation of the VAT system, authorities made it mandatory for businesses in the UAE to register, issue valid tax invoices, maintain records and file a periodic VAT return which can be done either monthly or on a quarterly basis.
Similar to Oman, the government in the UAE also exempted basic food items, healthcare, education and social services from VAT. This was done so VAT does not become a burden for the weaker sections of the society in the emirate. Items that are taxed in the UAE include electronic goods such as smart phones, laptops, cars, jewelry and watches.
Saudi Arabia too, zero-rated and exempted basic food items, healthcare, education and social services from VAT, whereas Bahrain zero-rated and exempted a number of additional supplies. Authorities in the UAE, Saudi Arabia and Bahrain have spent a good amount of their resources to create awareness and educating businesses about VAT.
Interestingly, a report by PwC Middle East Economy Watch revealed that revenues from VAT have exceeded expectations, which is welcoming news for the Omani government.
There is a great deal Oman can learn from how Saudi Arabia, the UAE and Bahrain introduced VAT. Oman can learn a great deal from the challenges faced by these nations. What the Sultanate can also do is research on the implementation process of VAT both in the UAE and Saudi Arabia and make amendments when it comes to implementing VAT in their own nation. It’s been nearly three years since both the UAE and Saudi Arabia successfully levied VAT. But everything would depend on Oman’s capability and its preparedness to levy VAT.
Is the current level of VAT enough for Oman?
The current level of VAT was predetermined by the Common VAT agreement, by the six GCC nations in 2017. The standard rate decided back then was 5 percent, however, Saudi Arabia has increased it to 15 percent in 2020. According to estimates made by the IMF, VAT is expected to account for around 1.5 percent to 2 percent of Oman’s GDP. Even though the Sultanate expects to raise around $1.04 billion through the introduction of VAT and diversify its revenue stream, VAT alone will not be sufficient to cover the Sultanate’s deficits in revenue in the future. The Sultanate’s oil revenues represent roughly two-fifths of its GDP. Oil revenue also makes up to three-fourths of the government’s income. Compared to this, VAT is expected to collect a rather small sum, however, not insignificant.
The revenue generated for the government be it in Oman or the UAE, is relatively small. Hence, similar to Saudi Arabia, there is a possibility that Oman too might increase the standard rate in the future. The sultanate might also levy additional indirect taxes, however, very unlikely in the near future. In short, it can be said that VAT is one of the many fiscal strategies that the Omani government has or will introduce to reduce the economy’s dependence on oil.
VAT and its economic implications
So far it has been established that VAT will add more than $1 billion to the government’s revenue chest. Besides that, VAT is expected to bring in greater transparency and accountability. The implementation process for VAT is not complicated when compared to other indirect taxes. Transparency will come from the fact that VAT is levied on each level of the supply chain. This will lead to compliance and will allow authorities to track businesses and effectively monitor them. Also, VAT is collected at every level throughout the supply chain until the product reaches the final consumer. This creates a series of transactions that can be easily revisited in case of any discrepancies.
Oman has also made it mandatory for businesses to follow due diligence and make sure their transactions are compliant. This will lead to accountability. From an administrative point of view, VAT will facilitate the reduction in tax evasion, even though its implementation can prove to be expensive.
VAT is a consumption tax which means the revenue generated from it will not be fluctuating but constant to a certain degree. This will facilitate better planning when it comes to government spending. For VAT to be successful in Oman, it will need smooth implementation.