Written by: Reham Al Barakat - Reham@acolaw.net
Edited by: Shahab Al Bulushi - Shahab@acolaw.net
In 2016, the Gulf Corporation Council (GCC) countries have signed the Unified Agreement for Value Added Tax, stipulating that a VAT system in those states will be introduced within the following years. With the recent economic impacts attributed to the plunge in oil prices in 2019 which was later exacerbated by the spread of Covid-19, the government decided to introduce VAT to rebalance the economy. The Omani VAT Law which was issued in October 2020, came into force on the 16th of April this year, making the Sultanate the 4th member sate following, UAE KSA and Bahrain, to introduce the VAT system. Kuwait and Qatar are expected to follow suit with the latter already making plans to introduce VAT possibly later this year while the former is yet to introduce any plans or dates of implementing VAT due to the Kuwait National Assembly’s wide rejection to do so thus far (https://manshoor.com/politics-and-economics/kuwait-taxes/)
VAT is an additional fee charged by the government on the supply of goods and services. Although it is a tax on consumption, the government does not directly tax consumers. It is rather imposed on each stage of the supply chain, that includes production distribution and sales. Eventually the end consumer incurs the final price of VAT.
Standard rate: VAT is applied at a standard rate of 5% on taxable supplies. Taxable supplies mean the supply of goods and services which are leviable to VAT. This includes all goods and services except for specific exemptions and zero-rated goods and services.
Zero-rated supplies: According to the Law, the supply of certain goods and services are subject to 0% VAT. These include the supply of: medicines and medical equipment, specific food items determined by the Chairman’s decision, investment gold, silver and platinum, crude oil, its derivatives and natural gas, rescue planes and boats, air sea and land transport of goods and passengers for commercial purposes in addition to services relevant thereto.
Exempt supplies: The law provides a list of supplies that are exempt from VAT which include: financial services, healthcare services and related goods, educational services and related goods, undeveloped land, resale of residential properties, local passenger transport, and rental of properties for residential purposes. Imported goods related to the aforementioned supplies are also exempt. The VAT Executive Regulations provide further clarifications to the specific services and goods of the above-mentioned supplies which are exempt, as not all supplies relevant to those sectors are exempt. For example, although financial services are exempt VAT is still applicable to a financial service for which consideration is paid (ex: a fee). This includes commissions, any service charges including but not limited to processing, issuance and replacement fees.
The difference between zero-rated and exempt supplies is that where supplies are subject to VAT at a zero rate the taxable person can claim and recover VAT incurred by him. Whereas for exempt supplies the taxable person cannot claim and recover VAT incurred by him. Recovering VAT is further illustrated below.
Registration for VAT is dependent on the total value of taxable supplies, that is excluding any exempt or zero-rated goods and services. According to the law, this value is calculated from the period of November 2019 to the end of October 2020. This in addition to estimating the total value of taxable supplies expected to be generated from the end of October 2020 to September 2021. Where the calculated value exceeds or is expected to exceed the required registration threshold, the person will be required to register. The mandatory registration threshold is OMR 38,500 which imposes a mandatory obligation to register for VAT. The Tax Authority has categorized the mandatory registration into 4 categories as follows:
|Value or expected value of taxable annual supply||Registration timeline||Effective registration date|
|Exceeding OMR 1,000,000||01/01/2021 to 15/03/2021||16/04/2021|
|OMR 500,000 to OMR 1,000,000||01/04/2021 to 31/05/2021||01/07/2021|
|OMR 250,000 to OMR 499,999||01/07/2021 to 31/08/2021||01/10/2021|
|OMR 38,500 to OMR 249,999||01/12/2021 to 28/02/2022||01/04/2022|
Nonetheless, any person meeting the voluntary threshold of OMR 19,250 can register any time from the 1st of February 2021. Any person who carries out an economic activity and who has registered or is required to register with the Tax Authority based on their taxable supplies as explained above is known as a taxable person.
Mainly to recover VAT expenses. A taxable person is entitled to recover VAT expenses he has incurred through deducting input tax from output tax. Input tax is the tax incurred by the taxable person on goods and services that have been supplied to him, whilst output tax is the tax imposed by a taxable person on the supply of goods and services. If a business chooses not to register for VAT, they will not be able to recover VAT paid by them to suppliers through imposing VAT on their supplies, as they are not entitled to impose VAT. Nonetheless, such businesses might opt for increasing the price of the product to recover VAT paid by them. However, consumers are more likely to view such an increment without VAT in prices as unreasonable and could also complain to the relevant authority in that regard, and they are more willing to buy products compliant to the VAT laws and who have the legal right to increase prices through the imposition of VAT. Therefore, many businesses will incline towards registering for VAT and thus many businesses since the enactment of the VAT law have been registering with the Tax Authority.
Each taxable person is required to issue an invoice upon the supply of taxable goods and services. Invoices must be compliant to the requirements of the VAT Law and executive regulations which distinguishes between two types of tax invoices. Where the value of taxable supplies exceeds 500 OMR a full tax invoice is required. This must include:
Such invoices are more convenient where the supply takes place between taxable persons. Where a taxable person supplies to a non-taxable person or a consumer or where the value of supplies excluding VAT is less than 500 OMR, he can obtain an approval from the Tax Authority to issue a simplified tax invoice which shall replace the phrase “Tax Invoice” with “Simplified Tax Invoice” and include the above listed requirements, excluding:
Invoices should be in Arabic, and where an English invoice is issued an Arabic copy must be available upon the request of the Tax Authority. A consumer can ensure that the entity dealt with has the right to impose VAT, through the Tax Authority website by entering the tax identification number which will be verified through the website. This is done through https://taxoman.gov.om/portal/web/taxportal/vatin-validation. In the case a business is not registered with the TA, the consumer can contact the TA and has the right to a refund of the VAT paid.
Tax Period: According to the executive regulations in a tax year a tax period is divided into 4 periods and each period is of 3 months, i.e. on a quarterly basis, given that the first tax period starts from the effective date of registration. The first tax period begins on the 1st of January and ends on the 31st of March. The second tax period begins on the 1st of April and ends on the 30th of June. The third tax period begins on the 1st of July and ends on the 30th of September. The fourth tax period begins on the 1st of October and ends on the 31st of December. Those periods apply in the same way to every tax year. If a taxable person meets the compulsory threshold yet fails to register within the specified date, his first tax period shall begin from the effective date of registration. For example: a company makes an annual taxable supply of over One Million OMR, thus meeting the compulsory threshold of the first registration category with an effective date of 14th April 2021. Yet the company does not register until the 31st of May 2021. In such case any taxable supplies made from the 14th of April 2021 are subject to VAT for which the taxable person will be personally liable for, as those supplies at the time of sale were not inclusive of VAT. Which is why it is advisable for a taxable person to register within the specified registration timelines to avoid incurring such additional charges of the input tax which cannot be recovered through output tax as none has been collected.
VAT Return: A VAT Return is a form that should be filed online through the Tax Portal by the taxable person within 30 days following the end of a tax period. This VAT Return must specifically include the values of; taxable and exempt supplies, imported goods, output and input tax, and the total value of tax due for the said period will then be calculated by the computerized system. In the case a taxable person becomes aware of any faults in his submitted return sheet, or the supply value has varied, or if the consideration to be paid is not collected whether fully or partially, he should file a revised VAT return within 30 days from discovering the fault. However practically it is not easy to prove when the fault has been discovered thus, a taxable person is allowed to amend the VAT Return within 3 years from the date of submission. Nonetheless, in all circumstances a VAT Return cannot be amended if the Tax Authority has already begun with the inspection procedures relevant to that specific VAT Return. Moreover, nonpayment in due time will result in an additional tax of 1% of the total value due for each month delayed. In all circumstances, original tax invoices, records and declarations must be retained by the taxable person in case it is requested in an audit conducted by the Tax Authority.
All imports to Oman are subject to VAT, except those specifically exempt in the law. The VAT on imports should be collected by the Directorate General of Customs upon entry into Oman. VAT is imposed on the total customs value of the good or service, that is inclusive of any excise tax, custom duties, and fees relevant to transportation, commission, storage, insurance, and other charges as per the Common Customs Law. In the case an importer is a taxable person registered with the TA, he may request a deferral ,i.e. to pay the VAT at a later date. If his request was approved, he shall pay the due VAT with the submission of the Tax Return for the tax period in which the import took place.
Non-compliance by the taxable person with the VAT Law and Executive Regulations, such as deliberately refraining from registering when its mandatory, failure to maintain tax records or submitting forged records will result in penalties imposed by the Tax Authority. Penalties include fines of up to 20,000 OMR and an imprisonment sentence of up to 3 years dependent on the crime committed and penalty imposed according to the VAT Law. It is important for businesses to note the number of penalties leviable as they could be very costly particularly to smaller businesses.
The VAT Law prohibits the transfer of tax burden to others, and any agreement to do so is rendered void. This could mean any provision in a contract which provides for the transfer of tax liabilities is invalid. Additionally, contracts must be scrutinized to ensure the price set out is inclusive or exclusive of VAT. According to the law, contracts for continuous supplies in which there is no mention to VAT, the consideration thereof will be considered to be inclusive of VAT. While some contracts could be amended to refer to VAT, other contracts might not as to amend a contract all contracting parties must agree. But we advise that the parties to re-negotiate the terms to include VAT in order avoid any uncertainties as to the contractual relationship. Moreover, VAT shall apply also for a contract in which consideration has already been paid before the effective date, yet supply is due after the effective date. The consideration paid is inclusive of VAT unless stated otherwise in the contract. Thus, regardless of the type of contract whether it is a sales contract or supply of good contract or build and design contract or any other form of agreement to which VAT is applicable, parties to the contract need to ensure that the contract clearly states whether the price is exclusive or inclusive of VAT to avoid future complications specially for the supplier given that the general rule is the supplier incurs the cost of VAT.
VAT is ultimately a form of tax levied on the consumer. Although the different economic industries will be impacted by the application of VAT, the final costumer will eventually incur the cost as he is not a taxable person and is not entitled to a VAT reimbursement. Moreover, VAT is regressive in nature because it is a tax on consumption, and low-income earners consumer a bigger portion of their income, it effects them more. VAT also influences a consumer’s purchasing power, dependent on the spending patterns of each household, exacerbated by the current salary cuts and redundancies and leaves, their purchasing power is likely to be reduced. Again, this effects low-income earners more as they consume a large portion of their already low income!
Late 2019 Excise Tax had been imposed on the consumption of certain goods, government expenditure had also been cut in the aims of reducing the budget deficit. Nonetheless, greater measures were still required to reduce the budget deficit which is why VAT has been introduced. However, VAT comes with its challenges. Implementing a new VAT system is costly not only to the Tax Authority but also to taxable persons. The process of filing accurate invoices and Tax Returns and properly maintaining them is an extra work and can be costly to taxable persons. Similarly, the Tax Authority has to incurs the costs of running, administering and collecting the taxes and then ensuring their compliance. This will be highly dependent on the system implemented within the Tax Authority and how well trained and experienced the staff are.
In the short term, an increase in prices is expected as a result of the implementation of VAT on many goods and services resulting in inflation. Nevertheless, the exemptions and specific zero rate VAT on basic necessities is likely to limit the impact of inflation. The optimistic responses to the law say the 5% levied is not a high percentage comparing to other countries, However, looking at other countries VAT experience, such as the UK which began in 1973 with 10% VAT and currently has a VAT rate of 20%, and Saudi Arabia which implemented VAT in 2018 at a rate of 5% yet currently and only two years later has a VAT rate of 15%, and so there is an indication that the rate applied is more likely to increase in the upcoming years.
According to the finance minister and the chairman of the Tax Authority, VAT is expected to generate an annual revenue of OMR 300 to 400 Million. While this still does not cover current budget deficit of OMR 751.4 Million, it is going to reduce it. Nonetheless, more sustainable and innovative solutions are required to generate steady long term revenue and ensure the financial sustainability of the Sultanate. For example, the introduction of income tax on high-income earners could possibly be a more effective solution, as suggested by the ministry of finance published in the medium-term fiscal balance plan for the year 2020. Innovative solutions are also necessary because each countries’ circumstances change, and what might work elsewhere does not necessarily mean it would work in Oman.
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A&CO Law Firm Team