The Omani businesses would be gearing up for undertaking the VAT implementation considering the effective date of 16 April 2021. While ascertaining the VAT implications for every transaction and configuring the accounting system by far remains the priority, the businesses should place due importance to the transition management. Often transition aspects are thought through only few days prior to implementation. The financial impact of the transactions which are spilling-over the implementation date could be huge if it is not managed appropriately.
As per the Oman VAT Law, if an invoice or payment is received prior to implementation date for a single supply transaction, then VAT would be applicable if the goods are delivered or services are completed after the effective date. Here, the businesses should plan for the transactions during the cut-over period and ascertain the transactions which are likely to spill-over. For transactions which would complete post implementation date, VAT would be payable by the business. It is expected that the Executive Regulations would specify whether the VAT is to be paid in the first tax period or later. Also, the Executive Regulations would specify the circumstances under which VAT can be collected from the customer. If there is no possibility to commercially collect VAT from the customer, then the VAT payable would become cost of the business. Businesses are expected to keep due records to reflect whether the goods were delivered, or services were completed prior to implementation date. If adequate records are not available, then the Tax Authority may demand VAT on such transactions including penalties (i.e. additional tax). With regard to goods, acknowledged delivery receipt from the customer is likely to be accepted by the Tax Authorities, however with regard to services it would be a challenge. What constitutes completion of service is subjective; in case of construction contracts completion certificate is liked to be accepted whereas in case other services such as business consulting services an acceptance of service as completed is required.
Another important exercise which businesses should do (for continuous contracts spilling over the implementation date) is to ascertain whether the customer contracts contains tax clause or not. This is because if the contract did not contain a tax clause then the value of contract would be considered as VAT inclusive on a pro-rata basis. Again, this would lead to increase in costs for the businesses. It is expected that the application of the provision would be restricted to the circumstances in which customer is not registered or customer is not able to recover input tax; the finer details are expected to be specified in the Executive Regulations. In case of B2B supplies (and assuming that the customer would be registered under VAT), the possibility of amending contract to include tax clause could be explored. The customers should be able to agree, provided VAT charged can be recovered as input tax.
Similar exercise could be undertaken for vendor contracts and ascertain if there is a tax clause. If the businesses are engaged in provision of exempt supplies, then it is advisable to reach-out to the vendor and negotiate with regard to VAT clause. If the contract does not contain the VAT clause, then the businesses may request the vendor to absorb the VAT. While if the contract contains a tax clause and vendor has decided the charge VAT (which cannot be recovered fully by the business), then the opportunity on negotiating the value could be explored.
Also, the readiness of the accounting system should be checked as the businesses in certain situations may be required to raise tax invoice to recover the VAT component only for transition transactions. This would cover two scenarios – one where businesses can recover VAT from the customer; – second where VAT is a cost. Accounting system should be appropriately configured to ensure that both reports are generated for arriving at the VAT payable amount.
An early start to the VAT implementation exercise including working towards transition management, would help businesses in reducing the VAT cost and undertaking due contractual changes.
(Sunny Kachalia is a Chartered Accountant and GCC VAT implementation expert. 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.)
