Oman is set to become the 4th GCC country to implement Value Added Tax (VAT). The Royal Decree No. 121/2020 was passed, and the VAT Law was published by the Official Gazette of Oman on 18 October 2020. The date of implementation is expected to be 16 April 2021 (i.e. 180 days from the date of publication of the VAT Law). The Executive Regulations which would clarify certain aspects of the VAT Law are expected to be published soon by the Official Gazette. The rate of VAT would be 5% with certain exceptions (i.e. certain transactions would be zero-rated or exempt).
With less than 5 months’ time, there are many aspects which businesses in Oman should consider during VAT implementation. Majority of the businesses consider the implementation as an impact on finance / tax function and miss to consider the overall impact on the business, i.e. operations, procurement, sales, administration, human resources, information technology, etc. The large business houses should form a steering committee with a representative from each function as the VAT touchpoints may have an impact on their function / department.
The VAT Law published appears to be exhaustive (on comparison with other GCC VAT Laws) and could be used by the businesses to initiate the VAT implementation exercise. Broadly, the VAT implementation would involve the following steps / processes:
- VAT impact assessment, i.e. identifying the VAT treatment for every business transaction
- VAT fiscal impact, i.e. ascertaining the financial impact on account of VAT (impact on cash-flow, working capital, etc.)
- IT impact, i.e. ascertaining the impact on the accounting system
- Process and documentation impact, i.e. defining the processes under VAT
- Transition management
Based on the VAT implementation in other GCC countries, there have been certain challenges encountered during the process such as lack of seriousness, starting the implementation and transition activity late, not appointing an implementation expert, replying on tax positions being discussed at industry forums rather than relying on the Law with respect to specific business scenario, etc. It is important that Omani businesses consider the experience / learnings from the previous GCC VAT implementation to avoid penal consequences.
There could be specific challenges which businesses may face during the implementation process considering the zero-rating and exemptions specified in the Oman VAT Law. Have discussed few challenges based on the sectors as below:
Retail sector: Certain food items would be zero-rated as per the VAT Law. The list of items which are zero-rated would be issued in due course. Often businesses are not able to map the product with the list (consider the composition of the product, purpose, etc.). Incorrect classification could lead to wrong zero-rating position.
Pharma sector: Medicines and medical equipment are zero-rated. However, the zero-rating is expected to apply in cases where the medicines are approved by / registered with the Competent authorities. The approval could be generic, or it may apply for certain period / certain class of medicines. It is advisable that for each sale / purchase it needs to be checked whether the medicine is approved to apply zero-rating.
Financial services: Banks and large financial institutions should classify the products into margin / fee-based income. This is because margin is exempt from VAT and fee-based income is subject to VAT. Businesses would also be required to consider the customer location as margin earned from customer outside Oman would be zero-rated. In addition to this, certain charges which are penal in nature would also be required to be identified as it may have a different VAT treatment. In majority of the transactions, Islamic finance products would follow the treatment of non-Islamic finance products; however, there are certain exceptions. Since financial services sector would have substantial portion of income which could be exempt, input tax apportionment would be a key challenge.
Logistics sector: International transportation, i.e. movement from Oman to outside Oman and vice-versa is zero-rated whereas local passenger transport is exempt and local transport of goods is subject to VAT at 5%. While entire transportation journey involves freight forwarder, agent, shipping line, feeder operator, etc.; it is advisable to ascertain the VAT impact on different charges for providing services. More clarity is expected from the Executive Regulations.
Export of services: Providing services to a customer based outside Oman is zero-rated subject to certain conditions. An important condition being that the benefit of services should accrue to the customer outside Oman. In other words, benefit should not be received by any other person in Oman. This is subjective and would largely depend on the arrangement with the customer and the nature of charge / services. It is advisable to identify such arrangements and evaluate the VAT treatment. Other GCC countries are divided in terms of VAT treatment on such transactions.
Also following the other GCC countries, it is likely that sector-specific guidance would be issued by the Oman Tax Authority which would clarify the VAT treatment on sectoral issues. An early start to the implementation would also lead to identification of sectoral issues and the businesses may appropriately decide to file representation with the Tax Authority.
Sunny Kachalia is a Chartered Accountant and works with WTS Dhruva Consultants, UAE as Principal. He possesses more than 12 years of experience in Indirect Taxes. You can find more about him at linkedin.com/in/sunny-kachalia-493905b4. Alternatively, you can write to him at [email protected] . Views expressed in the document are personal.
