On April 16, Oman’s government plans to roll out a 5% value-added tax across the country. Annual revenue from the new tax is expected to reach 400 million Omani riyals (approximately $1.04 billion). Additional revenue streams are sorely needed to help finance the budget: Omani officials in charge of the 2021 budget projected a $5.7 billion deficit. A successful implementation of the VAT is necessary, insomuch as it constitutes an important component of fiscal policy measures. However, the VAT alone is not sufficient to meet Oman’s mounting economic challenges, which will require significantly more progress on fiscal measures over the coming months and years.
An eventual VAT rollout has been anticipated since the adoption of a unified VAT agreement among Gulf Cooperation Council member states in 2016. Unlike Saudi Arabia and the United Arab Emirates, which implemented the tax in 2018 in accordance with the agreement, or Bahrain, which imposed a VAT one year later, Oman has delayed implementation for more than three years. In the interim, the Omani government imposed an excise tax on sugary drinks and tobacco in June 2019 and established a new Tax Authority later that year. Sultan Haitham bin Tariq al-Said reorganized the Tax Authority in April 2020, granting the entity its own budget and designating new personnel and directorates. Some manner of personal income tax on high-income earners is reportedly in the works for 2022 – a significant announcement given that no GCC state currently levies a personal income tax. However, a modest corporate income tax has been in place in Oman for several years.
Although the introduction of the VAT is not a radical step, it is bound to generate some resistance from Omani citizens and residents. Critics may chafe at the notion of tax hikes as the country seeks to rebound from an economic downturn. Oman’s gross domestic product contracted by 6.4% in 2020, the fiscal deficit rose to 17.3% of GDP, and central government debt increased to 81% of GDP, up from 60% in 2019. Growth expectations for 2021 range from 1.3% to 1.8% – better than expected but hardly a breakneck pace of growth.
Haitham likely considers the April 16 implementation of the VAT as long overdue rather than the right timing. Since assuming power in January 2020, Haitham has accelerated the pace of economic reforms. The late Sultan Qaboos bin Said, Haitham’s deeply respected predecessor, is largely credited with developing the infrastructure of the modern Omani state; however, he was unable to push through key economic reforms as his health deteriorated in the latter years of his reign.
Oman’s government is now focused on tweaking the nuts and bolts of economic policy. The sultanate has largely avoided announcing expensive new megaprojects and economic programs, as has been done in neighboring Saudi Arabia. Instead, a coordinated tax regime is a central component of broader Omani government efforts to more effectively manage the state’s finances. In October 2020, the sultan approved a Medium-Term Fiscal Balance Plan, which aims to eliminate the country’s fiscal deficit by 2025. Beyond plans to boost revenue, the government has sought to keep a lid on expenditures through reducing the public sector wage bill, targeted subsidies, and various consolidations of government-related entities.
A timely, smooth rollout of the VAT in Oman is crucial for maintaining the fragile state of investor confidence in the sultanate. On April 2, 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. Any last-minute changes – especially implementation delays – would likely inflict more economic damage than scraping the tax altogether.
A more likely scenario involves a number of tax-related carve outs that insulate certain individuals and firms from the full impact of the VAT. The most common forms of preferential tax treatment involve zero rating (levying a VAT at the rate of 0% on a product or service) and exemptions. Health care, education, financial services, and basic food items will be exempt from the VAT. Other exemptions are expected in sectors earmarked as priorities for economic diversification initiatives or in free zones and special economic zones, like the one in Duqm. The International Monetary Fund previously warned Gulf Arab governments that zero rating, exemptions, and varying definitions of taxable sectors could lead to a reduction of total tax revenue by up to 50%.
Neighboring GCC states pushed ahead with VAT implementation years ago. In 2020, Saudi Arabia hiked its standard tax rate up to 15% from 5%. Emirate-level governments in the UAE resisted opportunistic calls from segments of the business community to lower the VAT rate during the challenging economic year of 2020. Bahrain, which implemented the VAT in 2019, has likewise maintained its original 5% rate. In all three states, there are a plethora of exemptions and other forms of preferential treatment intended to cushion the economic impact on local citizens, such as first-time homebuyers.
Qatar and Kuwait have not yet implemented a VAT. Qatar appears next line in for the tax, although no official timeline for implementation is publicly available. The country’s General Tax Authority has reportedly put in place the necessary processes and systems but is waiting for final approval from the government. Kuwait’s government and Parliament are finding it difficult to agree on immediate financing for the public sector’s monthly payroll, so approving and implementing a new tax seems distant.
The implementation of the VAT in Oman is a Muscat-driven step to tackle year-on-year budget deficits and ensuing debt issues, which were made increasingly urgent by the acute economic shocks of 2020. On April 4, Oman’s Finance Ministry announced that it had borrowed $1.56 billion from the Oman Investment Authority, the country’s sovereign wealth fund, and another $4.6 billion from other internal and external sources. Oman must also contend with around $10.9 billion in external debt maturities in 2021 and 2022.
New tax revenue can help the government reduce its heavy borrowing needs, meet obligations, and make its financial ledgers more appealing for credit rating agencies, which ultimately reduces its borrowing costs. However, if Omanis aren’t ready to shoulder a 5% VAT, then they have a long, bumpy economic road ahead of them.
