VAT rate increase in Bahrain

As per our understanding, the Kingdom of Bahrain plans to double the standard rate of Value Added Tax (VAT) from 5% to 10% with effect from 1 January 2022. The National Bureau for Revenue (NBR) of Bahrain is yet to make an official agreement, to our knowledge, the proposed rate increase is part of the economic improvement plans following the impact of Covid-19 on the economy and Fiscal Balance Programme.

How could this impact your business?

  • Audits and queries - Businesses in Bahrain should expect an increased level of scrutiny from the NBR, as VAT becomes a more important source of revenue. There will be an even greater requirement for taxpayers to ensure that they are fully VAT compliant – penalties on the tax due amount could be doubled as a result of the higher tax rate.
  • Cash flow - The rate increase will also impact cash flow for businesses due to the timing difference between the payment and recovery of VAT, and cash flow planning will take on renewed significance. Similarly, businesses should review their internal systems and processes to reflect the increased VAT rate.
  • Cost increase - Businesses whose sales are partially or fully VAT exempt, such as Financial Services, Insurance and Real Estate sectors, will experience an increase in costs as a direct effect of the rate increase. Furthermore, the rate increase will impact across all industry sectors, with the end consumer ultimately bearing the brunt of the increase. It remains to be seen if some relieving measures to mitigate the impact, such as zero or reduced rates of VAT may continue to apply to specific or essential goods and services. 
  • Contracts and invoices - Taxpayers who carry on continuous or periodic supplies of goods or services should review existing contracts and documentation to take into account transitional provisions (yet to be published). For example, the determination of the correct rate of VAT to charge on contracts and supplies that span both December 2021 and January 2022. Our experience of 2019 VAT introduction in Bahrain, and the VAT rate increase in the Kingdom of Saudi Arabia (KSA), shows that the transitional rules can often be confusing for taxpayers, as well as difficult to implement.

Next steps

We expect additional details on the rate increase, including any guidance on transitional rules, to be released by the Authorities in the near future. In the meantime, we recommend that taxpayers start measuring the potential impact of the increased VAT rate on their cash flow, contracts, operations, IT, and supply chain. 

Did you find this useful?