Bahrain’s government is planning to double its rate of value-added tax (VAT) to 10%, according to Bloomberg, in an effort to curb its large budget deficit.
The move echoes a similar change by Saudi Arabia last year, when it tripled its rate of VAT to 15% – although, as some observers have pointed out, the timing of the rises in the two countries is notably different.
The tax rises are a sign of the difficulties that many Gulf governments face in trying to deal with large mismatches between spending and revenue while also trying to diversify their economies away from a heavy reliance on oil and gas revenues.
The change in tax rate in Bahrain will require parliamentary approval, although that is unlikely to prove problematic. The Bahrain News Agency cited Shura Council chairman Ali bin Saleh Al Saleh in a meeting with government ministers on September 26 as saying he “asserted the Shura Council’s continuous support to the ambitious plans of the government”.
It will though add further complexity to the regional tax landscape and suggests taxation could provide fertile ground for competition between the Gulf states in the future.
Unity proves taxing
Originally, VAT was designed to be a signal of how the six members of the Gulf Cooperation Council (GCC) – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE – could act in unison.
In 2016, when the six countries signed an agreement to introduce a VAT, the plan was to have a common rate of 5% across all their economies. The agreement said this would be in line with a 2011 economic agreement “which seeks to reach advanced stages of economic integration” between the six countries.
However, the reality has been rather different. A lack of regional cohesion, combined with the varying political and economic issues in each country, has meant the rollout of the tax has happened only in fits and starts. As time passes, more differences in approach are becoming evident.
Saudi Arabia and the UAE were the first to introduce a VAT system, in January 2018. Bahrain followed a year later and Oman brought in the tax in April 2021. Qatar and Kuwait have yet to introduce it.
The four countries which have introduced it all did so at an initial rate of 5%. However, Saudi Arabia tripled its VAT rate in July 2021 to 15% and it seems that Bahrain will now double its rate to 10%.
Saudi Arabia’s crown prince Mohammed Bin Salman said in an interview with Al-Arabiya television in April that the sharp rise in VAT would be temporary. “Of course, it’s a hurtful measure, he said. “It’s a temporary decision. It will continue for a year, maximum five years, and then things will go back to what they were.”
In a region where undemocratic, oil-rich governments are nervous about levying any taxes on their citizens, VAT has to date proven to be a relatively uncontroversial way of raising revenue from something other than oil and gas. Now that it is in place in many countries, some of those governments have found that raising an existing tax is often far simpler than introducing an entirely new one. Bahrain is unlikely to be the last in the Gulf to hike its VAT rate.