Muscat: The ongoing COVID-19 pandemic is likely to affect the final implementation date of VAT, which may have been much earlier in 2021, according to a tax expert.
It is also likely to impact individuals and business’ ability to consume the additional charge of 5 per cent and associated expenses.
This is likely to encourage Oman to implement much broader initial exemptions and/or a phased implementation, to seek to support individuals and businesses in Oman adapting to the new VAT regime.
Although Oman is expected to implement a VAT at a standard rate of 5 per cent, there is a possibility, given the Oman government’s concern with introducing an additional financial burden on business and individuals at this time, that they may implement at a lower rate (say 3 per cent) or introduce certain categories of 'relieved' persons/transactions for a period, such as one year, during a transitional phase
In an exclusive email interview with Times of Oman, Joanne Clarke, Tax Director at Pinsent Masons Middle East outlines the various issue, challenges and policy changes related to the implementation of VAT in Oman.
When do you expect Oman to implement VAT?
It is difficult at this stage to estimate the effective implementation date for VAT in Oman. Many economic indicators suggest that a prompt implementation on April 1 or July 1, 2021, would positively contribute toward much needed economic growth and stability in Oman.
A September 1, 2021 implementation date may achieve a reasonable balance between providing sufficient time for businesses and individuals to prepare for the impact from the implementation of VAT, while consciously moving toward contributing to diversifying and stabilising the local economy as early as possible, she said. “The effective date is expected to be confirmed imminently,” Joanne added, “with a possibility of a delay until 2022.”
What will be the expected VAT revenue contribution to Oman's GDP?
If we look at Organisation for Economic Co-operation and Development (OECD) countries as a benchmark, at an average standard VAT rate of 20 per cent, a country’s tax administration generally generates approximately 6 per cent to 7 per cent of GDP in VAT revenues.”
At a standard rate of 5 per cent, it would be reasonable to expect a general tax take of approximately 1.5 per cent to 2 per cent of GDP. This rate of return has been evidenced by the UAE, Saud Arabia and Bahrain VAT implementations back in 2018 and 2019 already.
If we look at these statistics in the context of Oman implementing a new VAT system in 2021 / 2022, the use of a potential phased implementation or significant exemptions, the impact of COVID-19 and a certain level of late or non-compliance initially, it would be reasonable to expect potential VAT revenue in the region of 1.2 per cent to 1.5 per cent of actual GDP in the first year of implementation.
Is Oman ready with support and resources to implement VAT?
To some extent, Oman should be more prepared than some of the other Gulf Cooperation Council (GCC) countries which have already implemented VAT, such as the UAE and Bahrain, on the basis that the Oman Tax Authorities already have the experience of administering a number of different taxes, such as Corporate Tax and Withholding Tax. That being said, a transaction tax such as VAT is somewhat more difficult to administer and collect. It requires a much higher commitment on the Tax Authority from a resourcing perspective as all industry sectors and almost all types of transactions are affected, and compliance generally takes place on a more regular basis. While Oman appears well on their way from a regulatory legislative perspective, there will be much more activities required by the tax authorities together with businesses before the effective date.
What is the impact it will have on businesses and consumers?
Generally, the burden of VAT rests with the end consumer. Salary and wage levels are rarely increased to reflect the introduction of VAT and therefore, consumers will initially suffer from increased prices reducing the buying power of their disposable income. This 12 – 18 month period of price inflation tends to fuel an increase in consumer spending immediately before the introduction of VAT, followed by a reduction in the purchase of luxury retail items thereafter. It may also trigger increased spending by consumers in the neighbouring GCC States, where VAT has not yet been implemented.
From a business perspective, the initial introduction of VAT can also attract some up-front and new on-going administration and compliance costs such as the costs associated with implementing VAT into businesses processes, controls, contracts and systems, the on-going compliance costs and the working capital costs of the additional VAT funds flowing through their business. In addition, businesses will generally feel the impact of consumer’s reaction to the implementation of VAT on their sales volumes and revenues for a period of time until the market re-adjusts. That being said, we usually see retailers taking advantage of the introduction of VAT by encouraging customers to make “VAT-free” purchases of high-value items such as cars and boats, together with long term commitments such as gym memberships, immediately prior to the implementation date.
Overall, the charge of VAT itself should be neutral for most businesses as it flows through the supply chain on to the final consumer. However, for any business undertaking exempt activities, which may include financial services, real estate and / or certain local transport transactions, VAT will become a real cost to their business. This in addition to the VAT on any non-business and / or entertainment type expenses for which VAT is generally irrecoverable for businesses.
Will the implementation of VAT hit business sentiments?
It will take time for businesses to generally accept the introduction of VAT in Oman and the positive impact it will have on stabilizing and diversifying the economy, including contributing to lowering the budget deficit. Businesses are and will be concerned with VAT being an additional burden on top of the significant impact of COVID-19 and the oil price dip.
What are the challenges the government faces for implementing VAT?
Aside from the challenge of a very careful timing of the implementation, in the wake of the oil price and COVID-19 crisis, the government will need to significantly upscale and upskill its staff to be able to successfully support businesses operating in Oman prior to the implementation with understanding the rules, manage the VAT registration process, dealing with high volumes of taxpayer queries, developing and publishing sufficient guidance, etc. The Tax Authority’s systems will also need to be upgraded significantly to have sufficient functionality and to be able to manage such high volume during the transitional period.
Oman’s government will also need to manage the expectations of the business community who may not wish to see VAT implemented in the region at this time and effectively manage to ensure full compliance by such businesses on a timely basis.