Oman to start levying a 5% VAT in six months as it looks to boost revenues

Oman's ruler has issued a decree to start levying a 5 per cent value-added tax in six months' time, state-run Oman TV said on Monday, as the Gulf oil producer seeks to boost revenues battered by low oil prices and the coronavirus pandemic.

The tax will be on most goods and services, though with some exceptions, according to a video presentation shown on Oman TV.

"The implementation of the #ValueAddedTax came to ensure the sultanate's financial sustainability, enhance its competitiveness, and reaffirm its commitment to international and regional agreements and improve the business environment," the government said on twitter.

All six Gulf Arab states agreed to introduce 5 per cent VAT in 2018 after a slump in oil prices hit their revenues. Saudi Arabia, the UAE and Bahrain have already introduced the tax, with Riyadh tripling it this year.

Oman, Kuwait and Qatar have not yet introduced the tax.

"The introduction of VAT is another important and positive sign to the market that Oman is looking to progress with a much needed fiscal reform programme after announcing spending cuts this year," said Monica Malik, chief economist at Abu Dhabi Commercial Bank.

Facing a 2.8 per cent economic contraction this year and a yawning government deficit of 16.9 per cent of gross domestic product, according to the International Monetary Fund, Oman has cut public spending to contain the financial leakage caused by lower oil prices and the downturn caused by coronavirus-related movement restrictions.

Major cuts in the first half of the year included areas such as defence and security, as well as investment expenditure, data released by the national statistics agency showed last month.

Despite the cuts, Oman posted a deficit of 826.5 million rials ($2.15 billion) in the first six months of the year, the figures showed.

"Further fiscal adjustment – both revenue and expenditure – will be required from Oman going forward, especially as the funding requirement will remain high given the outlook for ongoing government deficits and the rise in maturing debt from 2021. Revenue from VAT will likely be less than 2 per cent of GDP once consumption stabilises," said Ms Malik.

VAT will start in April next year, the Omani government said. Exemptions will include basic food commodities, healthcare, education, financial services, home rentals and the supply of crude oil, petroleum products and natural gas.

The VAT announcement comes ahead of an expected issuance of international bonds, Oman's first this year.