MANAMA: Businesses like financial services, insurance, and real estate, whose sales are partially or fully exempt, will experience an increase in costs as a direct effect of Bahrain’s proposed increase in value added tax (VAT) from five per cent to 10pc, an expert has said.

According to audit and advisory firm Grant Thornton Bahrain senior partner Jatin Karia, these companies will not be able to recover input tax, adding to their costs.

“Nevertheless, businesses like basic foods, healthcare, education, international and domestic transportation, and some construction-related industries may not see any impact, as they will be able to recover the additional tax from the tax authorities.

“On the other hand, some industries like jewellery and automobiles may have an indirect effect on account of economic factors created due to inflation and reduced spending power,” he added.

Explaining that the rate increase will have a temporary impact on the cash flow for businesses, Mr Karia said that this was mainly due to the difference in timing between the payment and recovery of VAT.

However, he added that a majority of businesses should make the recovery provided they do the necessary planning as regards reviewing internal systems and processes affected by the increased rate.

On the macro-drivers behind the Cabinet’s decision to raise the tax with effect from January 2022, the firm’s managing partner Jassim Abdulaal said: “Bahrain’s decision to raise the VAT is a confident, long-term decision that demonstrates its commitment towards its economic revival reform agenda. The aim is to diversify government revenues away from heavy dependence on natural resources and move towards more sustainable and stable income streams.

“While the timing and degree of the VAT increase are sudden, the decision can be understood as reflecting the kingdom’s willingness to undertake necessary measures for long-term benefit.

“We can see that the VAT rate increase will get gradually absorbed by the economy and should theoretically be neutral, however in the long run it will provide the necessary fuel and push to Bahrain’s economy,” added Mr Abdulaal.

Saudi Arabia tripled its VAT from 5pc to 15pc in July 2020, and Bahrain will become the second country in the GCC to raise its rates.

The increase in the VAT rate in Saudi Arabia has already shown successful outcomes, by raising around 37pc additional revenues in Q4-2020 and providing extra leverage to support the healthcare and socio-economic spending.

With only three months in hand before the VAT rate change goes live, Grant Thornton Bahrain’s senior manager for tax Muhammad Naveed advised businesses to take necessary measures for a smooth rollover.

He has suggested that they proactively communicate with vendors, customers, and other stakeholders outlining what their business will do about the VAT rate increase and what is expected from them.

Mr Naveed also urged them to review pricing strategies, contact IT experts to make the necessary changes in the existing systems and test the system with mock VAT returns/reports.

“All documentation changes should be agreed upon and made before January 1, 2022. The proactive involvement of the senior leadership will be required more than ever to conclude the necessary changes – which makes excellent commercial and reputational sense to deal with the change,” he added.

Also commenting, credit rating agency Moody’s has said the VAT increase marks a renewal of the fiscal reform momentum that it sees as a pre-requisite for Bahrain to secure continued financial support from fellow GCC neighbours.

“Bahrain’s plans to double the value added tax to 10pc from January 1, 2022 are credit positive. Aside from adding up to another 1.8pc of GDP to government revenue, the implementation would mark a renewal of the fiscal reform momentum, which we see as the pre-requisite to the augmentation of the GCC financial support package that is about to run out in early 2023,” said Alex Perjessy, vice-president and senior analyst at Moody’s.

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