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Abu Dhabi, UAEWednesday 19 December 2018

Oman may delay VAT introduction to 2019

Ministry of Finance reportedly plans to introduce excise taxes instead by mid-2018

Banks in Oman and Kuwait stand to benefit from the uptick in oil prices following a three year slump however Oman’s banking sector is more vulnerable than Kuwait and faces a number of risks, according to BMI. Getty Images.
Banks in Oman and Kuwait stand to benefit from the uptick in oil prices following a three year slump however Oman’s banking sector is more vulnerable than Kuwait and faces a number of risks, according to BMI. Getty Images.

Oman may delay levying a 5 per cent value added tax until 2019 instead of 2018, a move that could hamper its ability to generate alternative revenues to plug the budget deficit and steady its finances.

The state broadcaster Oman TV yesterday reported that while introduction of VAT could be postponed, the country will introduce a tax on selected items next year to boost the country’s revenues.

The report, which cited finance ministry sources, said the new excise tax on tobacco, energy and carbonated drinks could be introduced by the middle of next year, but it did not specify the rate of the levy.

The ministry of finance could not immediately be reached for comment.

In October, the UAE introduced excise tax on tobacco and energy drinks at a rate of 100 per cent and fizzy drinks at a rate of 50 per cent, following in the footsteps of Saudi Arabia which implemented the levy in June.

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GCC-wide VAT implementation likely to be delayed, IMF official says

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All six members of GCC economic bloc, which account for a third of the world’s proven oil reserves and heavily rely on the sale of hydrocarbons for revenues, have agreed to introduce taxes to help shore up their finances and offset the impact of dwindling oil proceeds on their economies.

A 5 per cent VAT rate is expected to raise 1 to 2 per cent of GDP in the GCC, according to IMF estimates.

Only Saudi Arabia and the UAE, the region’s two biggest economies, are on schedule to meet the January 1 deadline on VAT implementation. Bahrain, Kuwait and Qatar had not set definitive deadlines as to when they plan to follow suit and are at varying stages of preparations.

Tax experts in the region believe Kuwait will also lag considerably in introducing VAT, partly because of its slow-moving civil service. Its relatively independent parliament may want a say in the process, according to a Reuters report, which added that Bahraini officials expect VAT to be implemented by next summer.

The reasons behind the potential delay in Oman’s VAT plans are not clear but Muscat-based U-Capital argued that while timely implementation meant additional revenues, postponement is a step that is also good for the businesses in the sultanate.

“Implementation of VAT on time would have been beneficial to the government as it would have handed them additional tax money, but we believe the government took prudent decision by delaying,” said Hettish Karmani, U-Capital’s head of research.

He said the additional time would allow authorities to study the “pros and cons of VAT” as only two countries within GCC are so far ready to implement it. “Delay in implementation will give more time to the corporate sector and people to prepare for the VAT regime,” he said.

The IMF has estimated a 5 per cent VAT in Oman could raise about 1.7 per cent of GDP, or around US$1.3 billion, for the government.

Jihad Azour, the director of the IMF’s Middle East and Central Asia department, in October said that while the UAE and Saudi Arabia are moving in the right direction with regards to economic reforms, Oman and Bahrain need to speed up their pace because of their lower financial buffers.

Oman’s state budget deficit for the first 10 months of this year has narrowed to 3.2bn Omani rials (Dh30.51bn) from 4.81bn rials a year earlier, according to finance ministry data. Fitch Ratings, earlier this month, cut Oman’s credit rating by a notch to BBB-minus – just above junk territory – with a negative outlook, citing the country’s budget deficit, which it estimated at 12.8 per cent of GDP in 2017.

Standard & Poor’s already rates Omani debt as junk.