Reference no: EM131068750

Case Study

Majlis Al Shura voted for major tax reforms on Tuesday to fill the state's coffers and meet the 2016 budget deficit.

"We have voted yes for a 3 per cent increase in corporate income tax, removing the tax free ceiling of OMR30,000 for companies and bringing all companies under taxation regardless their grade," Tawfiq Al Lawati, a member of Majlis Al Shura's economy committee, which has proposed the amendments, told the Times of Oman (TOO).

The current corporate income tax for companies, which is 12 per cent, will become 15 if approved by the State Council. Certain companies depending on their activities, sector and revenue, which have been given relaxation, will also have to pay the tax.

"We have also voted to increase taxation for the oil and gas industry-based companies from 12 per cent to 35 per cent, and increase the tax for Liquid Natural Gas (LNG) companies from 12 per cent to 55 per cent to bring it at par with oil companies. The oil companies are paying 55 per cent tax," the Shura member added.

During the Shura meeting, 76 per cent voted yes against 23 per cent voting no for tax reforms.

"We won't be able to totally resolve the financial crunch faced by the oil price dip with these tax reforms. However, these are the only measures which can be adopted first with less impact on citizens," the Shura

Oman's income has fallen by more than 60 per cent since June 2014 when it used to sell oil at $115 per barrel. Thus, it becomes very clear that serious measures need to be taken to avoid a major fall in Oman's income measured in Gross Domestic Product (GDP) and Gross National Product (GNP).

According to data released by the National Centre for Statistics and Information (NCSI), Oman's budget deficit for the first eight months of 2015 rose to OMR2.68 billion as falling crude oil export revenues started affecting the fiscal balance.

This is against a surplus of OMR205.7 million for the same period last year and against a projected deficit of OMR2.5 billion for the entire year by the government.

A member from Oman Chamber of Commerce and Industries (OCCI) said they have to analyse the pros and cons of the move in detail.

"We have to look into the proposal in detail. We understand that due to the oil price dip, the country is going through a tough situation and it has been forced to come up with such measures. But at the same time, we expect government to be more lenient in other areas, which will allow private sector companies to operate with ease. Rules that are hindering our operations should be removed," Mohammed Hassan Al Ansi, senior official, OCCI, said.

On December 1, another top official from OCCI said the move has to be reconsidered as it may negatively affect foreign investments, which will force companies to exit the Omani market.

"This will eventually aggravate the economic crisis, not solve it," Redha Juma Al Saleh, vice chairman of OCCI had said earlier.

"SMEs (small and medium enterprises) funded and supported by OCCI will also be affected," Al Saleh added.

Meanwhile, a Muscat-based financial expert said that an increase in corporate tax is inevitable, considering the tight financial position resulting from the drastic fall in oil prices.

"It is time everyone puts their mind to solving the national problem. Companies may respond to the tax increase through cost cutting, increasing the price of their products/services, cutting wages and employment, depending on their competitive strength and consumer behaviour," N Gurumurthy, a financial expert, said.

"With regards to the removal of exemption of tax for smaller companies across the board, it may affect smaller companies, most of who operate with lesser capital, market size and margins.

Many of them may wish to increase the price, which may be inflationary for the economy," Gurumurthy added.

The expert also added that in the short to medium-term, consumers may end up paying more.

"It is possible that an increase in tax for oil companies may result in a corresponding increase in the price of oil for retail consumers. Certainly, the proposed measures would help the government in bridging the revenue gap and narrowing the deficit to some extent. However I cannot quantify as to what extent this may help in tiding over the current difficult situation," Gurumurthy added.

Question 1

(a) Provide a detailed analysis of three Macro-Economic Indicators identified from the case. The analysis should also highlight how these indicators provide a better measure of economic health of Oman.

Question 2

(a) Distinguish between monetary policy and fiscal policy and discuss any two instruments of fiscal policy from the case and impacts of those instruments on Oman economy.

Question 3

(a) Discuss the concept of liberalization and critically discuss any two potential benefits that Oman economy can gain in pursuit of liberalization strategies.