Oman joins other Gulf countries in implementing ‘sin tax’
Cash-strapped Oman has begun implementing a “sin tax,” following in the footsteps of most Gulf Cooperation Council members but major financial institutions are calling on Muscat to do much more to get its fiscal house in order.
The government of Omani Sultan Qaboos bin Said Al Said is mindful, however, of domestic discontent over the country’s economic plight with protests over unemployment making it tricky for Muscat to enact deep economic reforms, including introducing a value added tax (VAT).
Oman enacted on June 15 an electronic system for registering excise taxpayers, setting the stage for residents to be taxed on products deemed harmful to public health and the environment after a 90-day grace period. Once in effect, the Omani “sin tax” will involve a 100% levy on tobacco, pork, alcohol and energy drinks and a 50% tax on carbonated drinks. The government expects to take in about $260 million annually from the tax.
Oman is the fifth Gulf Cooperation Council (GCC) member to impose a “sin tax.” Saudi Arabia and the United Arab Emirates led the way, implementing excise taxes in 2017, followed by Bahrain. Qatar introduced its levy January 1, 2019. Kuwait has indicated it will institute a “sin tax” in its 2020-21 fiscal year.
Muscat reportedly dragged its feet for 18 months before moving forward with the new tax over concern about the domestic response.
The implementation of a selective tax on “sin” products came from a decision by the GCC Supreme Council in December 2015. That session also produced an agreement for GCC members to establish a 5% VAT on designated goods and services.
Financial institutions, including the International Monetary Fund (IMF), have long encouraged GCC countries to tax businesses and citizens as part of financial reforms to move their economies from being oil-centric and to chip away at the cradle-to-grave welfare systems entrenched in the countries.
Saudi Arabia and the United Arab Emirates enacted a VAT levy effective January 1, 2018, with Bahrain beginning a staged rollout of its VAT this year. Qatar has said it has no plans to introduce a VAT in 2019, while Kuwait has suggested it will implement the tax in its 2021-22 fiscal year.
The Omani government reportedly set a target date for its VAT implementation for September 1, though it is unclear how much progress has been made in establishing the necessary regulatory framework and preparing businesses and residents for hitting that target date.
A recent visit by an IMF team to consult with the Omani government underscored the significance of taxes in helping the sultanate dig out of its dire economic plight. The IMF team said that while Oman’s economic activity was gradually recovering, “deeper fiscal consolidation is important” and “in the near term, introducing VAT and measures to reduce government spending are of the essence.”
Lower oil prices in 2014 and the Omani regime’s reluctance to tackle overspending and fiscal reforms contributed to Muscat’s debt-ridden economy. The Omani regime will be borrowing for the fourth consecutive year to cover its budget deficit, which is expected to be $7.3 billion, 9% of GDP, in 2019. The government intends to raise $6.2 billion internationally and domestically with the remainder to be pulled from the country’s reserves.
However, Muscat will be facing higher borrowing costs. In March, Moody’s Investors Service downgraded Oman’s credit rating to “junk status,” joining fellow top-ranked rating agencies Standard & Poor’s and Fitch Ratings in their sovereign rating downgrades for the sultanate.
Moody’s explained its rationale for assigning Oman its lowest investment-grade rating of Baa3 by saying: “The key driver of the downgrade is Moody’s expectation that the scope for fiscal consolidation will remain more significantly constrained by the government’s economic and social stability objectives than it had previously assessed.”
Sultan Qaboos’s government has been treading lightly in implementing deep reforms that could cause domestic backlash but the Gulf state needs to stimulate its economy and create more jobs, particularly for young Omanis. The country’s unemployment rate was officially put at 16% in 2017 but it well could be higher and the government has been experiencing periodic protests from jobless citizens.
A protest in January 2018 by hundreds of unemployed people in front of the Ministry of Manpower in Muscat as well as a demonstration in the southern city of Salalah prompted the Omani regime to announce it would work to create 25,000 public sector jobs in six months.
A nationwide protest January 1 this year by job-seeking men in Muscat and the provinces of Dhofar and Salalah resulted in the government declaring it was creating a national centre for unemployment addressing private and public sector job creation.