On October 12^th, 2020, Haitham bin Tariq Al-SAID, the Sultan of Oman issued a decree to start imposing a 5 % VAT within six months.

The tax will be applied 100 % on tobacco and derivatives, energy drinks, alcoholic beverages, and pork, while 50 % will be applied to soft drinks based on their retail price.

The sultanate intended to impose 5 % VAT in 2018 but postponed it until 2020. The law is part of a 2016 agreement between all six Gulf Cooperation Council (GCC) states and Saudi Arabia. The UAE and Bahrain have already implemented the 5% VAT law.

Even before the virus outbreak, Oman was often seen among the more vulnerable economies in the six-nation Gulf Cooperation Council.

The result of lower crude prices and Covid-19 this year took an especially heavy toll on the region. The sultanate followed the footsteps of neighbors this year in offering debt to take advantage of low borrowing costs.

The fiscal deficit during the first half of the year widened 25% on a yearly basis, according to preliminary figures from the statistics service.

Monica MALIK, the chief economist at Abu Dhabi Commercial Bank, said: “The introduction of VAT is another important and positive sign to the market that Oman is looking to progress with a much-needed fiscal reform programmed after announcing spending cuts this year”.

With a 2.8 % economic contraction this year and a 16.9 % of GDP public deficit, according to the International Monetary Fund, Oman has cut public spending to limit the financial leakage caused by lower oil prices and by coronavirus lockdowns.

Important cuts in the first six months of the year included areas such as defense and security, as well as investment expenditure, according to the national statistics agency presented in September 2020. Oman posted despite cuts a deficit of $2.15bn in the first six months of the year, a 25.1 % deficit increase on a yearly basis, the figures showed.

“Further fiscal adjustment, both revenue and expenditure, will be required from Oman going forward, especially as the funding requirement will remain high given the outlook for continuing government deficits and the rise in maturing debt from 2021. Revenue from VAT will likely be less than 2 % of GDP once consumption stabilizes” said MALIK.

This article was edited using the data from the Ncsi.gov.om, Business-standard.com, Aljazeera.com, Middleeastbusiness.org, Bloombergquint.com, and Arabnews.com.