The Impact of VAT

Gulf Insider talks to Mr Sajeev Surendran, Managing Partner of Dadabhai Advisory, about the implementation of VAT in Bahrain.

What protections will private businesses have against miscalculations made by VAT inspectors?
While the chances of miscalculations by inspectors is very rare, the best protection for any private business against such cases is a certified tax expert who prioritizes the best interests of the business and will be able to notice any miscalculations. The team at Dadabhai Advisory prides itself in maintaining the highest levels of service to its clients in this regard.

As many businesses in Bahrain operate on tight margins, how can a business be expected to pay VAT for an invoiced amount that hasn’t yet been paid by the client?
A comprehensive impact assessment will have to be performed by the business in order to understand how VAT will affect them in regards to their payments both to suppliers and the authorities. Based on the results of the assessment, the business will have to establish solid financial discipline in its organization to anticipate any adverse liquidity positions that it may fall into.

How money raised from VAT will be spent?
Ideally, the government will be using the money collected by VAT to improve the existing public infrastructure present in the country, as well as invest in projects that will provide sustainable returns to the country’s economy.

Which businesses will be most impacted and which businesses least – by the introduction of VAT?
VAT will affect all business, however, industries such as Real Estate, Healthcare, and Education will be least affected. While it is difficult to go into detail, our tax experts are able to effectively assess the actual impact of VAT on any business operating across multiple industries. Dadabhai Advisory will soon be releasing a comprehensive series of books on VAT and its impact on various aspects of the economy and businesses.

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What do you expect will be both the most positive and negative effects of VAT for Bahrain?
The most positive effects on Bahrain will be the influx of revenue generated by the economy that will help finance the Government’s requirements. However, the negative effects will be felt by final customers who will effectively be paying more for products and services that they used to obtain for a lower price.

Several Companies have complained that they are at a commercial disadvantage by having to charge VAT when their smaller rivals are not yet required to do so. For Example, a gold company told us their sales dropped substantially as their customers have moved to smaller rivals who are able to undercut their prices. What advice would you give on this?
Undercutting has always been prevalent in Bahrain’s market, both now and before VAT. At some point in the supply chain all business both large and small are expected to pay VAT, and hence it is ultimately up to the business whether to charge it to their customers or not. As the market normalizes to VAT and all business eventually have to be registered, the dynamics of the market will even out and ensure that the conditions are at a similar level to what they were before the introduction of VAT. Dadabhai Advisory is able to assist businesses in navigating the initial rough stages of VAT and ensure that they will be in strong positions for when the market has finally adjusted to it.

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How will VAT affect Bahrain’s cost of living and inflation?
With the introduction of VAT at 5% in the Kingdom of Bahrain, there will be impact on the cost of living and inflation as prices will be raised across the economy and individuals will struggle to meet some of them as easily as before the implementation of VAT, however employers are expected to take this into account when determining increments for working members of the society.

Once VAT is fully operational do you expect the rate, currently at 5% to keep increasing as has happened in other countries that introduced the tax?
In the near future, we do not expect the rate to change until the market has comfortably adapted to the current rate, however as with all developing/ developed economies, economic growth is directly interlinked with tax rates, and hence to promote more growth, tax rates will have to rise in order to maintain sustainability.

Dadabhai Advisory WLL, is an Accounting and Advisory service provider in the Kingdom of Bahrain, set up to provide professional services in Accounting, Taxation (VAT), Financial Management, Corporate Policies and Business Process Re-engineering, Transaction Services, Internal Audit, IT Control Services and other management services for the SME and Corporate Clients. For more information, contact +973 1720 5275.

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