Can Oman’s new “sin tax” help balance the budget?

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Oman has implemented a new tax on alcohol, sugary drinks and tobacco products, as the country seeks to bolster state revenues amid ongoing fiscal reforms.

The so-called “sin tax” came into effect on June 15, with the introduction of a 100% excise on alcohol, energy drinks, tobacco and pork products, and a 50% tax on carbonated drinks. The alcohol excise was subsequently reduced to 50% for a transitional six-month period.

Oman follows in the footsteps of Saudi Arabia, the UAE, Bahrain and Qatar to become the fifth GCC country to introduce such a tax in recent years.

Health experts praised the decision as a positive development in improving public health and the fight against non-communicable diseases, while politicians and economists said the tax would boost Oman’s bottom line.

It is expected that the tax will generate OR100m ($260m) annually. In addition, the anticipated reduction in consumption and hence imports of the taxed items is tipped to improve Oman’s trade balance.

See also: The Report – Oman 2019

Tax to help with fiscal reforms

The introduction of the tax is part of a series of reforms aimed at closing the budget deficit and reducing debt, which have both increased in recent years on the back of the collapse in global oil prices.

This saw prices drop from more than $100 a barrel in mid-2014 to a low of around $35 per barrel in January 2016.

Official statistics show that the budget deficit subsequently went from 0.3% of GDP in 2013 to a high of 20.6% in 2016, while debt rose from 4.9% of GDP in 2013 to 48% by the end of 2018, according to Fitch.

In response, the government has sought to rein in public spending, and has also looked to attract alternative sources of revenue through the development of new industries, support for greater private sector activity and the introduction of new taxes.

“Taxes are a sufficient mechanism for dealing with the fiscal deficit,” Vijay Kumar Gopalan, CEO of Gulf Investment Services, told OBG, noting that the government needs to tread a fine line in its attempts to improve the fiscal accounts while still supporting the business environment.

Calls for introduction of a value-added tax

Alongside an increase in global oil prices, these measures have helped reduce the budget deficit from 20.6% of GDP in 2016 to 9% last year. However, international institutions have called for more action to improve the fiscal situation.

Following its Article IV Consultation with Oman in early July, the IMF outlined the need for further fiscal consolidation, calling in particular for the implementation of a value-added tax (VAT) in the near term.

Despite initially agreeing to introduce a 5% VAT at the beginning of last year to combat a fall in oil prices, the country has delayed the decision in the face of sluggish economic growth and high unemployment. The tax is now not expected to be implemented until at least 2020, and possibly not until 2021.

The call for deeper reforms comes amid a recent downgrade in Oman’s credit rating.

In March Moody’s downgraded Oman’s credit rating from “Ba1” to “Baa3”, the agency’s lowest grading, following the example of fellow agencies Fitch and Standard & Poor’s.

Sustainable development goals

Ongoing economic challenges notwithstanding, the government is continuing to roll out its plans for diversification.

Under Vision 2040, the sultanate’s long-term development plan, efforts are being made to bolster the non-oil economy and reduce dependence on hydrocarbons.

Oman’s long-term development plan was recently put under the spotlight when the country submitted its sustainable development goals at the UN High Level Political Forum on Sustainable Development, held from July 8 to 18 in New York City.

Ali bin Masoud Al Sunaidy, minister of commerce and industry, said at the event that “Oman is focusing on innovation, technology and protecting the environment as pillars for completing the vision and leading Oman to a future in tune with the UN’s goals.”

The forum is part of a voluntary national review to assess the government’s goals in line with the UN’s 2030 Sustainable Development Goals.

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