Oman has been looking at options to bring the deficit down as well as ease the economy from over reliance on government led spending. Image Credit: Gulf News Archive

Muscat: Oman plans to take a step unheard of in the Gulf region: It's going to start taxing the income of wealthy individuals beginning in 2022, as part of a broader programme to tackle a budget deficit that's ballooned due to low oil prices and the coronavirus pandemic.

By reducing government spending while spurring investments, the plan is projected to bring the budget deficit - estimated to reach nearly 19 per cent of gross domestic product in 2020 by the International Monetary Fund - to 1.7 per cent by 2024, the Ministry of Finance said in an emailed statement. Revenue from the income tax will be used to fund social programmes.

The tax would apply to high-income individuals, but the plan - whose implementation is still currently being studied - doesn't specify income brackets.

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Shied away

Affluent governments in Arab Gulf economies have long steered clear of imposing taxes of any kind, both because the region's tax-free status has been used to attract labor and companies.

But the oil crash in 2014 forced them to change their thinking. Oman, Saudi Arabia and the UAE have all introduced value-added taxes, and began re-evaluating generous state-supported benefits. The impact of the coronavirus has only deepened the need to beef up government coffers.

Oman's government is also planning to gradually pare the state's subsidies on electricity and water until completely removing them by 2025, as well as expanding visa-fee exemption to more countries in a bid to spur tourism.

Oman's debt surged to 60 per cent of GDP last year. In October, the sultanate sold $1.25 billion in seven-year securities, and $750 million in notes maturing in 2032, and said it was in talks to win support from some states in the region, according to its bond prospectus.

The International Monetary Fund sees Oman's economy shrinking 10 per cent this year, the steepest contraction among peers.

"Reducing the fiscal deficit so sharply by 2024 looks ambitious, given the impact of fiscal consolidation on the economy and social aspects," said Monica Malik, chief economist at Abu Dhabi Commercial Bank. "Any signs of sustained progress with the reform programme will be very positive."