Bahrain, the smallest amongst the six GCC countries including Saudi Arabia, UAE, Oman, Qatar and Kuwait has announced during the last week of September 2021 to increase the VAT rate to 10% from the prevailing rate of 5% effective from 1st January 2022.
Sheikh Salman bin Khalifa Al Khalifa, the Finance and Economy Minister said in an official briefing “The Kingdom is emerging from the pandemic with reasons to be highly optimistic and the plan announced today aims to turbocharge the recovery.”
The Council of Ministers in Bahrain has approved the VAT rate hike to re-stabilise the Fiscal Balance Programme initiated during the end of 2018 however severely impacted by Covid 19.
VAT is a consumption tax and ultimately, the consumers bear the cost increase due to VAT rate hike. It is largely believed that the zero-rate would continue on essential supplies including basic food, healthcare, education, the oil and gas sector, the construction of new buildings, local and international transport. Metals and reality sectors are also expected to be out of this new tax structure and certain financial services might also enjoy an exemption.
What needs to be addressed by the Businesses in Bahrain?
Like every tax rate increase, the VAT rate hike shall also have implications on businesses who should first assess the impacts of the tax raise from their operational perspective considering both internal processes & systems and then critically review the legal requirements about charging of VAT and reporting the right amount of tax due to the National Bureau of Revenue (NBR), Bahrain.
As the recent pandemic has posed serious cash flow challenges to all businesses the world over making it difficult to get going, the businesses in Bahrain need to have sound and strategic plans in place to optimize the working capital cycles. Due to the difference in timing between the payment and recovery of VAT, the rate hike will have an impact on cash flow.
Concrete planning must also be in place for the smooth transition to the higher tax regime approximately in a month. Simply changing the VAT rate from 5% to 10% in their ERP systems would not suffice and all transitional provisions must be assessed with utmost care for every individual contract. It needs to be ascertained if contracts with customers and suppliers extend beyond 1st January 2022 and if any special VAT rules and regulations apply to them.
What needs to be the focus areas for Bahrain businesses?
Businesses need to focus upon a number of crucial areas including
- Getting ready for Increased Audit frequency from NBR as the rate hike becomes the most crucial source of revenue for the government
- Being aware of Increased compliance requirements as two-time penalties may be imposed on the tax due amount because of the higher tax rate
- Correct understanding of transitional rules, especially for businesses involved in continuous and periodic supplies of goods and services and upgrading of IT Systems with automation
- Strategic planning Cash flow in terms of VAT being due before payment is received from creditors. The cash flow impact may be higher for businesses in a constant refund position such as certain exporters.
- Identifying needs to modify terms and conditions of existing contracts with suppliers and customers.
How can IMC help?
IMC is a cross border corporate service provider with a local presence in Bahrain and comes with extensive experience in VAT implementation and compliance systems. We successfully handled a smooth transition to a higher VAT regime in different businesses sectors in the UAE and Saudi Arabia.
We have a team of experts with proven experience in VAT-related challenges and how to mitigate them.
We are keenly monitoring all developments in this regard and looking for additional information on the rate increase and transitional rules.
As the time is limited, we strongly suggest that taxpayers must immediately start a 360-degree analysis on the potential impacts of the increased VAT rate on their operations, supply chain, invoices and contracts, cash flow, internal audit schedule and IT infrastructure.
