24 October 2012
Muscat: Oman government is planning to amend the existing tax legislation to accommodate Islamic banking products and services as also to create a level playing field with its conventional
counterparts.
The global audit, advisory and tax consultant KPMG has been awarded the project by the tax department of the Ministry of Finance to make recommendations on amending the tax legislation so as to accommodate Islamic banking products and services so that they are not treated less favourably than conventional products, two senior officials of KPMG told Times of Oman in an exclusive interview.
"In Islamic finance, the way transactions are entered into is very different. You buy an asset and sell the same (instead of giving a loan and paying interest in conventional finance). If you look at the transaction as it is, the profit may be liable to tax in the first year, which may put the Islamic banks at a disadvantageous position compared to conventional banks,- said Ashok Hariharan, partner and head of tax for KPMG in Oman.
As the government is in an advanced stage to announce Islamic banking regulation and two Islamic banks are all set to start operation, the amendments in tax legislation are required to be in place.
"As banks are getting ready for launching Islamic banking products, you should make sure that the tax regulations are also equally supportive to deal with this new development in the country,- Ashok Hariharan added.
Elaborating on the need for amendments in the existing tax law in the country, Khalid Yousaf, director, Islamic Finance Advisory Services at KPMG, said; "Every time you carry out a transaction in property, you have to pay 3 per cent (tax). If you do an Islamic mortgage under Ijara, or Morabaha, then the bank has to own the assets so that property first has to transfer to the bank's name.
The bank then has to transfer it to the client's name, when the repayment is completed. If you compare it to conventional finance, you are paying 3 per cent extra, because it is an Islamic finance transaction and that means the Islamic finance transaction becomes unfavourably treated by the tax authorities.-
UK experience
Yousaf said countries like the United Kingdom have already made amendments to their tax laws to accommodate Islamic banking products and services. The stamp duty is applied only once in such transactions in the United Kingdom.
Hariharan said KPMG is expected to complete the work within six months. However, the legislation process may take some more time.
Yousaf noted that the regulatory framework for Islamic banks was developed by Ernst & Young on behalf of the Central bank of Oman and the legal framework, which is the civil law, is already exists in the country. The Sharia law applies to families, inheritance and other matters and the taxation law needs to be amended now.
The Sultanate amended its tax law in 2010 to reduce uncertainties, disputes and to make it more user-friendly to understand the legislation.
Muscat: Oman government is planning to amend the existing tax legislation to accommodate Islamic banking products and services as also to create a level playing field with its conventional
counterparts.
The global audit, advisory and tax consultant KPMG has been awarded the project by the tax department of the Ministry of Finance to make recommendations on amending the tax legislation so as to accommodate Islamic banking products and services so that they are not treated less favourably than conventional products, two senior officials of KPMG told Times of Oman in an exclusive interview.
"In Islamic finance, the way transactions are entered into is very different. You buy an asset and sell the same (instead of giving a loan and paying interest in conventional finance). If you look at the transaction as it is, the profit may be liable to tax in the first year, which may put the Islamic banks at a disadvantageous position compared to conventional banks,- said Ashok Hariharan, partner and head of tax for KPMG in Oman.
As the government is in an advanced stage to announce Islamic banking regulation and two Islamic banks are all set to start operation, the amendments in tax legislation are required to be in place.
"As banks are getting ready for launching Islamic banking products, you should make sure that the tax regulations are also equally supportive to deal with this new development in the country,- Ashok Hariharan added.
Elaborating on the need for amendments in the existing tax law in the country, Khalid Yousaf, director, Islamic Finance Advisory Services at KPMG, said; "Every time you carry out a transaction in property, you have to pay 3 per cent (tax). If you do an Islamic mortgage under Ijara, or Morabaha, then the bank has to own the assets so that property first has to transfer to the bank's name.
The bank then has to transfer it to the client's name, when the repayment is completed. If you compare it to conventional finance, you are paying 3 per cent extra, because it is an Islamic finance transaction and that means the Islamic finance transaction becomes unfavourably treated by the tax authorities.-
UK experience
Yousaf said countries like the United Kingdom have already made amendments to their tax laws to accommodate Islamic banking products and services. The stamp duty is applied only once in such transactions in the United Kingdom.
Hariharan said KPMG is expected to complete the work within six months. However, the legislation process may take some more time.
Yousaf noted that the regulatory framework for Islamic banks was developed by Ernst & Young on behalf of the Central bank of Oman and the legal framework, which is the civil law, is already exists in the country. The Sharia law applies to families, inheritance and other matters and the taxation law needs to be amended now.
The Sultanate amended its tax law in 2010 to reduce uncertainties, disputes and to make it more user-friendly to understand the legislation.
© Times of Oman 2012
