Oman to introduce 5pc VAT by April 2021

Cash-strapped Oman has announced plans to introduce a 5pc value-added tax (VAT) "within 180 days" as it looks to boost state coffers that have been hit hard by the Covid-19 pandemic and resulting fall in global oil prices.

The country is the largest non-Opec oil producer in the Mideast Gulf and is heavily reliant on hydrocarbons. Oil and gas exports make up over 70pc of state revenues and around 60pc of total exports.

The tax will be levied on most goods and services, with exemptions on essential food items, medical care, education and financial services. The implementation of the VAT will provide an "additional resource for the state's public finances to ensure the continued quality of public services", the authorities said. "It will also support the achievement of the sultanate's objectives to reduce dependence on oil and other hydrocarbon products as the main source of revenue."

Oman's oil revenues have been squeezed by the collapse in oil prices since the onset of the pandemic in the first quarter, and also by the country's participation in the Opec+ crude production cut agreement which has required it to produce well below its capacity since May. Oman pledged to cap its crude output at 682,000 b/d in May-July and 722,000 b/d from August through to the end of the year. Its production is set to remain constrained until at least April 2022, when the current agreement expires.

The move to introduce VAT is latest in a raft of measures that have been implemented to try to bolster the sultanate's finances, including a slimming down of the government, a drive to rationalise state spending and most recently a plan for a new bond and sukuk offering. But years of heavy reliance on debt to offset a widening budget deficit have contributed to a downgrading of the country's credit rating to junk by all three major credit rating agencies, which means tapping the bond markets will not come cheap. In August Fitch forecast that Oman's fiscal deficit would end up at 20pc of GDP this year ̶ around 4.8bn rials ($12.4bn) ̶ which is almost double what the country had projected in its 2020 budget in January.

Oman will become the fourth Gulf Co-operation Council (GCC) country to implement VAT under the GCC VAT framework that was signed in 2016, after the UAE, Saudi Arabia and Bahrain. Qatar and Kuwait have suggested that they will follow suit before the end of 2022.

By Nader Itayim