VAT’s indirect economic spinoffs: reduced cost of debt, job creation

October 18, 2020

MUSCAT: The Oman government’s decision to roll out Value Added Tax (VAT) with effect from April 2021 will not only buoy the country’s constrained fiscals but perhaps just as importantly, it will have beneficial and far-reaching socio-economic impacts as well.

For one, VAT implementation will contribute to a gradual, but significant, reduction in the government’s interest cost burden in financing its sizable debt. Secondly, the introduction of a new tax regime in the country will create potentially thousands of jobs for Omanis in a variety of accounting and tax-related fields.

According to Muscat-based tax expert Alkesh Joshi, the benefits accruing to the national economy as a result of VAT implementation will far outweigh the cost burden on consumers once the new 5 per cent levy – one of the lowest VAT rates in the world – comes into force on goods and services next April.

“VAT implementation will unleash a number of beneficial spinoffs – direct and indirect – with positive ramifications for the wider Omani economy,” Joshi, Partner, Oman Tax Leader, MENA Energy Tax Leader at EY, said.

“We expect revenue collection from VAT, estimated to range from RO 250 – 300 million for the first full year of implementation, to offset Oman’s mounting budget deficit, albeit modestly initially. But there’s a far more important spinoff as well: the implementation of a new tax regime will encourage international rating agencies to issue more favorable outlooks for the Omani economy, as opposed to the relatively unflattering ratings that have been issued, of late. A positive rating outlook will make it less expensive for Oman to borrow from international markets.”

Citing budgetary estimates, the tax expert noted that the 2020 State Budget has allocated a staggering RO 860 million towards the financing of the country’s outstanding debt for the year, up from RO 630 million in 2019.

“With positive rating outlooks, this enormous interest burden will be progressively reduced in the coming years. Indeed, combined with collections from VAT, this saving on the cost of borrowings could result in a net benefit for the Omani economy ranging from RO 800 million RO 1 billion annually in a few years,” Joshi remarked.

Thus, while the VAT collection in itself is expected to be modest, the knock-on effects for the economy, notably in reducing the budget deficit, will be enormous, says the expert. “Going forward, with a lower budget deficit, there will be less pressure on the government to withdraw from national reserves, which can be set aside for future generations. Furthermore, the new revenue stream from VAT, as well as the savings accruing from reductions in the cost of borrowings, can be utilised for infrastructure development and social welfare.”

Employment generation is another promising spinoff from VAT implementation, he noted. With the VAT Law effectively requiring every tax-liable company to comply with the new tax regime and maintain their books accordingly, the requirement for qualified accountants and tax auditors, among related disciplines, such as IT and computing, will be significant.

“VAT has the potential to spark the growth of a whole new industry necessary to underpin the efficient operation of this new tax regime. We reckon that potentially thousands of new jobs will be created, mostly in the fields of accounting and tax audit, but also in hardware and software support, training services, and so on, as a result of this new tax.”

Joshi also sees the new tax as an opportunity for citizens and residents to contribute to nation-building at a time when the country is facing huge economic challenges. “The modest 5 percent levy on goods and services is a small sacrifice we should bear to help Oman at this juncture. In addition, VAT also has the potential to somewhat level the playing field between the economically weaker and affluent sections of the populations. Experts have found that low-income households make a relatively small contribution towards VAT because the bulk of their household expenditure, covering food, healthcare, and education, is zero-rated or exempt from the new tax. But in contrast, affluent households make a larger contribution towards VAT because the major share of their expenditure is on high-end goods and services which are all taxable.”


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