VAT: Registration criteria for exempt, out-of-scope or free zone categories

Value Added Tax (VAT) has a significant role to play for all businesses that have a taxable turnover more than the mandatory threshold. The Tax Authority of the Sultanate of Oman has specified in Royal Decree 121/2020 that all businesses falling under a given slab for registration, must register if their taxable turnover or taxable expenses exceed the threshold. Ideally, transactions are divided into 5 categories under the law: Taxable Supplies, Exempt Supplies, Mixed Supplies, Out-of-Scope Supplies and No Supplies. A taxable person who is carrying out 100 per cent exempt supplies may choose to not comply with all regulations under VAT, which was clarified under Law. However, since such an entity will choose to not register or comply, they will not be able to claim the credit on the taxable expenses and thus for them overall cost of doing business will increase. Article (42) specifies businesses carrying partly taxable and partly exempt supplies have to register under VAT Law and claiming input credit will be according to procedures determined by the Regulations. So, they will only get at best proportionate input credit or bit less than that. Its important for such business, to closely examine the cash flow impact and prepare in advance for the same. Businesses having 100 per cent out-of-scope business (third port shipments) may ask for an exception to registration if they want to skip the claiming of input credit. The Tax Authority may come with a provision for seeking an exception from VAT if the business has out-of-scope transactions or they have 100 per cent zero-rated supply and doesn’t want to fall under Tax regime. Having 100 per cent out-of-scope business with huge input credit, such businesses should register under VAT and claim eligible Refund of input credit. Again, it’s imperative to do this evaluation now. For businesses in the special economic zone which is also called Free Zone, the registration criteria depend on what type of business one is carrying and whether it is goods or services. As specified under Article (54) of the VAT Law, the treatment of VAT will remain the same as the suspension status of the customs duty in accordance with the Customs provision. Thus, goods will be imported once it’s cleared for consumption in Mainland Oman — if goods are imported in free zone and directly re-exported that should be out-of-scope. However, if one imports goods for consumption in free zone — they will be regarded as import and such business would need to declare these goods as import for VAT purposes and apply Reverse Charge Mechanism. Needless to mention, taxable supplies require business to register and comply in ordinary course. Thus, it’s important to understand which category the goods or services of the business falls into and identify implication of that on compliance or cash flow or business model itself. Stay tuned for our next update on another important concept under VAT. [By Nirav Shah - A  Collaboration Partner with HC Shah Chartered Accountants (Oman) for VAT Advisory, Email: vat@hcshah.co]