Oman is on course to become the first Gulf Cooperation Council (GCC) state to introduce a personal income tax as the sultanate ramps up efforts to boost revenue and diversify its economy away from hydrocarbons. The draft law, approved by Oman’s Parliament in July, has been sent to the State Council for final approval, a decision analysts say is highly anticipated.

The Omani government is planning a levy ranging from 5% to 9%, but its application to citizens and expatriates will be different. Omani citizens will be taxed at a flat rate of 5% on their net global income above $1 million. Expatriates pay a tax on incomes exceeding $100,000, a move that is likely to be closely scrutinized by other Gulf states.

While Oman’s initiative could nudge other GCC countries toward similar reforms, immediate adoption seems unlikely, says Mazen Salhab, chief market strategist—MENA at BDSwiss. Saudi Arabia and the United Arab Emirates have indicated they have no plans to introduce income taxes. And Oman, for its part, “may face challenges in competing with its tax-free neighbors for skilled expatriates and international businesses.”

The logic behind the sultanate’s move is clear, however. Along with Bahrain, Oman’s economy has strained under the weight of a heavy debt burden that saw the ratio of public debt to GDP reach almost 70% at its peak in 2020. Austerity implemented under Sultan Haitham bin Tariq Al Said, Oman’s head of state, has since pushed it back to around 35%, according to London-based Capital Economics.

Earlier reforms aimed at tightening fiscal policy included the introduction of a 5% value-added tax in 2021, but the optics surrounding an income tax are likely to ripple through the GCC expatriate workforce. And its expected impact on Oman’s budget—adding just 0.2% to GDP by 2026, according to Fitch Ratings’ forecasts—is minimal. Still, an income tax would provide the government with an additional tool to diversify future revenue sources. The good news is that earlier cuts in government spending, combined with a determination to stabilize public debt, have had a dramatic effect on Oman’s budget position. From a deficit of nearly 20% of GDP in early 2021, it swung into a surplus of 2.5% last year, according to Capital Economics.