There is never a great time to introduce valued added tax (VAT), but Omanis and those living in the Sultanate, long opposed to its implementation, may see it as the more palatable option as the country battles against the dual impacts of the Covid-19 pandemic and the crippling effects of the slump in international oil prices.
Widely considered to be among the Gulf’s most vulnerable economies, Oman, which is the biggest Arab oil exporter outside OPEC, faces one of the widest fiscal deficits across the region in 2020, with the International Monetary Fund (IMF) estimating it will reach around 16 percent of GDP.
The country’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, according to a statement Tuesday. 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.
Moody’s has revised its Brent crude price assumptions for 2020 and 2021 to an average of $35 per barrel and $45 respectively.
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 OMR500 million ($1.3bn) in the state budget.
Oman also cut the salaries of new government employees.
From October 1, the country is to introduce a tax on sweetened drinks, following up on the 100 percent tax implemented on tobacco, alcohol, pork meat and energy drinks in June last year, which was expected to generate about OR100m ($260m) annually, Saleh bin Said Masan, head of the economic and financial committee at the Shura Council had previously said. An excise tax was also introduced at the same time.
Economic equilibrium
However, while the excise tax will boost the country’s coffers, it is the imminent implementation of VAT that is expected to have the greatest impact – the IMF estimated the generation of new revenue between 1.5 and three percent of non-oil GDP, from the introduction of VAT.
Steve Kitching, tax partner, Grant Thornton, told Arabian Business: “Oman’s decision to implement VAT had been long outstanding due to the general public’s shun on the matter. Nevertheless, and as a response to the severe financial and economic repercussions of the recent pandemic outbreak, this has become an important and urgent move by the state as they look for various financial measures to generate more fiscal revenue for the public welfare and to achieve economic equilibrium.
“To that effect, this can arguably be the best time to implement this measure as the public is more understanding and welcoming of post-Covid corrective actions.”
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.
Revenue outlook
According to Scott Livermore, ICAEW economic advisor and chief economist at Oxford Economics, the introduction of a five percent levy could generate about OMR300m ($780m), a touch over one percent of projected GDP.
“With recent shocks amplifying pre-existing fiscal strains and low oil price environment weighing heavily on the fiscal revenue outlook, adjustment measures have become even more urgent,” he told Arabian Business.
“This should offset some of the pressure on the deficit, which will nonetheless remain wide at over 12 percent of GDP.”
Oman will become the fourth country in the GCC to implement VAT, following the UAE, Bahrain and Saudi Arabia – the kingdom has increased the VAT charge from five percent to 15 percent in order to tackle its own fight against Covid-19 and depressed international oil prices.
Historically, about 80 percent of Oman’s revenue has been generated by the exports of oil and its derivatives. Economic diversification and developing non-oil based revenue streams in order to reduce reliance on hydrocarbons has been on Oman’s agenda for the past period.
Measures such as the Tanfeedh programme and Oman Vision 2040 have already been rolled out to promote non-oil based sectors such as fisheries and aquaculture, transport and logistics, manufacturing, mining and tourism.
In the UAE, VAT collections were far higher than forecast in the first year of implementation, reaching AED27 billion ($7.4bn) compared to the government’s original projection of AED12bn ($3.3bn), according to government data.
Jeanine Daou, PwC Middle East’s indirect tax leader, told Arabian Business: “Neighbouring GCC countries publicised first year VAT revenues that were significantly ahead of budgeted estimates. While the introduction of VAT in Oman could have an initial inflationary effect on the economy, the curve generally tends to flatten after the first year of implementation as observed in other countries, including the GCC countries that have already implemented VAT.”
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