The impact of VAT on the Omani economy

On 16 April 2021, Oman introduced VAT at a standard rate of 5 per cent.

Oman is the fourth GCC country that has now a VAT system, following the UAE, Saudi Arabia and Bahrain. Although all the VAT regimes in the region are based on the GCC VAT Framework Agreement, there are key differences between the four countries.

GCC states have the discretion to zero rate and exempt certain categories of supplies and Oman has used this discretion. Oman is introducing VAT in a phased approach whereby businesses with a turnover of more than OMR 1,000,000 should already be registered. The subsequent deadlines are July 1 for businesses with turnover between OMR 500,000 and OMR 1,000,000; October 1, 2021 for businesses with turnover between OMR 250,000 and OMR 499,999 and April 1, 2022 for businesses with turnover between OMR 38,500 and OMR 249,999.

Compared to other jurisdictions in the GCC, the Oman VAT law has a broad scope of exemptions and zero rated goods and services. The difference between exempt and zero rated supplies is that taxpayers providing exempt supplies cannot recover the VAT incurred on expenses to make that supply whilst a taxpayer making zero rated supplies can recover the VAT.

In this article, I will be providing a high level overview of the impact of the introduction of VAT in Oman on consumers, businesses and the Oman economy.

Consumers
A 5 per cent tax will obviously lead to an increase in consumer prices, resulting in more inflation and less purchasing power.

Fortunately, the Oman VAT law provides for a broad scope of zero rated products that are basic necessities such as certain food items, medicines, rental of residential properties, healthcare, education and local transportation. This will reduce the impact of the introduction of VAT on prices, especially for low-income groups.

Businesses
Although VAT is a tax that is levied on consumption, the business has the obligation to collect the VAT and remit it to the tax authorities. The business is practically acting as tax collector for the authorities.

This obligation comes with administrative responsibilities such as VAT compliant invoicing, maintaining appropriate books and records and submitting VAT returns on a monthly or quarterly basis. The business is responsible for assessing whether and how much VAT is due on the goods and services provided. Incorrect accounting for VAT may lead to penalties.

For complex transactions or products the business may have to consult with advisors leading to additional cost to be compliant. Business may also need to hire additional staff to look after VAT (compliance) matters.

Furthermore, when a business carries out VAT exempt supplies VAT has also a direct financial impact on the business. As set out in the introduction, taxpayers that carry out VAT exempt supplies is not entitled to recover the VAT incurred on expenses to carry out the exempt supply, effectively increasing the costs by 5 per cent. This should be factored into the pricing of the exempt supply. This equally applies to businesses that have not registered for VAT because they have not exceeded the mandatory registration threshold. These businesses may consider applying for a voluntary VAT registration to offset the irrecoverable VAT. The voluntary registration threshold is OMR 19,250 of supplies and/or expenses.

For businesses that only carry out taxable supplies, VAT should in principle be neutral. This is in principle as charging an additional 5 per cent may impact consumer behaviour and result in a decrease in demand. The consumer may decide not to buy a product or service or substitute the product with one that has a zero rated or exempt treatment, if possible.

Oman economy
In the short term, the introduction of VAT may result in a decline in economic activity, largely cause by the fact that some consumers may have brought their purchases forward to avoid paying an additional 5 per cent.

For the long term, with the introduction of VAT, the government of Oman will have an additional source of revenue and be (a little) less dependent on revenue from hydrocarbon. This should reduce the fiscal deficit and allow the government to use the additional revenue to stimulate the economy where deemed necessary.

Bastiaan Moossdorff is a senior VAT adviser at Baker McKenzie Habib Al Mulla