‘VAT could be effective to raise revenues’

TNS

Bahrain residents must prepare for a spike in inflation as value-added tax (VAT) gets rolled out, experts have said. GCC states are expected to adopt VAT of up to five per cent from 2018 applying to most goods and services with basic food items, healthcare and education being exempted.
The exact date of implementation is not yet known though it is expected that GCC states will most likely introduce VAT on
January 1, 2018 or by January 1, 2019 at the latest. Data from Informatics and e-Government Authority (IGA) shows that consumer prices in Bahrain increased 3.3pc year-on-year last month, following a 3.7pc rise in May and marking the lowest inflation rate since March.
The country’s inflation rate averaged 2.27pc from 2008 until 2016, reaching an all-time high of 5.22pc in January 2009 and a record low of -2.06pc in March 2011.
Global advisory firm PricewaterhouseCoopers’ (PwC) tax experts told participants at a forum at the Four Seasons Hotel Bahrain Bay yesterday that VAT is an indirect tax on consumption and is levied on business transactions, ie, on goods and services supplied in the course of business.
PwC in Bahrain Tax partner Ken Healy said VAT would not just affect consumers, but also have a broader impact on businesses as well. “You will definitely see some inflationary pressures to the extent that businesses are able to pass on the effects of the VAT, although 5pc is quite small as compared to 20-25pc in other countries,” he said.
On the reasons for VAT, Healy said GCC governments need to diversify income sources given the reduced income from oil. “VAT is seen as an effective tool for raising revenue to achieve government objectives while preserving the neutrality for businesses.
“If designed and operated correctly and efficiently, it can provide significant revenues with limited administrative costs and impact on business,” he added.
PwC Dubai Industry Tax adviser Clarence Ellis said during the forum, which was organised by the Bahrain Chamber of Commerce and Industry (BCCI) in co-operation with PwC, that “we would be fooling ourselves if we think there will not be some impact on prices”.
According to PwC Dubai director for indirect taxes Brian Tilly, while VAT is a tax on consumption and levied on the price charged to the customer, it is expected that prices will increase by the amount of VAT.
“However, it is ultimately a matter for suppliers to determine the price of their goods/services,” said Tilly. A presentation by PwC made during the forum showed that consumers should expect to pay 5pc VAT
on retail purchases, car sales and rentals, hotels and restaurants, repairs and maintenance services.
Whereas basic food, medicines and medical equipment, exports and public transport, would remain “zero-rated” or exempt.
The PwC team said while there was no confirmed information on the list of basic food items that will be exempted, they said under the GCC Customs Law, 94 basic food products were exempt from customs duties and the same items with limited additions would likely make up the VAT-exempt list.
These food items include fresh fruit, coffee and tea, wheat and cereal flour, sugar, and infant milk foods. Other food items – processed and cooked – and foods falling in the luxury goods category such as confectionery, chocolates and soft drinks are likely to be subject to the standard 5pc VAT.
Pointing out likely difficulties for businesses, BCCI’s second deputy-chairman and industrial committee head Abdulhameed Al Kooheji said since many business transactions in Bahrain were done via installment payments, it may lead to companies facing cash flow issues as they would have already paid VAT on a transaction, whereas the payment in full was yet to be received.
BCCI board member and transportation and logistics committee head Abdulhakim Al Shemmari said, “VAT should only be implemented in Bahrain in parallel with other GCC countries as Bahrain should not lose its competitive advantage.”
“For instance, Bahrain will soon have a brand new mall called The Avenues which will attract thousands of visitors and it should not be that things cost more in Bahrain and are cheaper in Dubai or Saudi Arabia,” he added.