Ahmed Alsulaiman, Managing Partner, KSI - Bahrain Consultants & Public Accountants: Viewpoint

Viewpoint: Ahmed Alsulaiman

The beginning of 2018 has witnessed a lot of new developments related to the introduction of VAT within the UAE and Saudi Arabia, the implementation of which began on January 1, 2018. Sheikh Ahmed Al Khalifa, the minister of finance for Bahrain, has officially announced that the country will also introduce the new tax, and has stated that the process of implementation will begin in October 2018.

These days, when one visits the UAE or Saudi Arabia and purchases something from a restaurant, canteen, grocers shop, bakery or fashion outlet, he/ she can notice a new line on the bill of the invoice, indicating the addition of the new 5% VAT on the total amount that one has to pay. This indirect tax item – in addition to the other taxes and fees recently introduced by the GCC authorities – can be expected to reshape the economies of the GCC member states in a number of different ways.

The first of these is that consumers will likely become more cautious when it comes to how they spend their money. Second, VAT coupled with other taxes and fees – and the increased price of fuel – will lead to considerable price rises. Third, due to these price rises, expatriates on lower income levels will have to re-evaluate whether or not they wish to continue living in the GCC. Fourth, those items and sectors that are exempt from VAT will become the target of new investments, until they reach a higher penetration level. Lastly, consumers – especially those on lower incomes – will seek cheaper consumer items, particularly when it comes to things like cigarettes and energy drinks.

Nonetheless, the boycott of Qatar by three of the six GCC states casts some doubt over the possibility of the success of the VAT arrangements, and the implementation of this and other unified projects in the GCC. If, for example, Qatar decides not to abide by the unified VAT agreement, it could undercut its neighbours and create a haven for investments.

Given the range of complexities that the VAT rollout has entailed for the government and tax authorities of both the UAE and Saudi Arabia, the four remaining GCC states will no doubt be following developments in these countries closely in order to learn from their experiences.

According to the Bahraini minister of finance, a 5% VAT will be implemented on many types of goods and services. The tax will be imposed on the following sectors and segments: telecoms; water and electricity; traffic and licensing; real estate; construction; hydrocarbons – including petrol, diesel and gas – modern cars from dealerships; car rental; luxury goods; mobile phones; clothes and watches; restaurants; and the movement of goods and services. However, the health, education and international transport sectors will all be exempted.

The Ministry of Finance, which regulates the new VAT, has stated that a tax collection system will be established in Bahrain and that companies with an annual income of over $100,000 will be required to register for VAT. In addition, income tax will be imposed on companies with annual profits up to, or in excess of, BH40,000 ($106,000).

Studies undertaken to examine the impact of the implementation of VAT on the Bahraini economy indicate that the state will receive BD500m ($1.3bn) from the new tax, along with a further BD60m ($159m) from selective taxes and BD750m ($1.9bn) from income tax within the first year. Taken together that is a total of BD1.3bn ($3.4bn).

The revenue gained from the VAT and other taxes will be used to establish a network of infrastructure. This will include the construction of roads, streets and bridges throughout the country. The tax revenue will also contribute towards the improvement of transport and communications infrastructure, as well as the construction of hospitals, educational facilities and other public services for the country.