Bahrain’s rise in value-added tax indicates the regime’s deteriorating financial crises, prompting citizens to rise in anger against the country’s dire crises management.
Observers agree that although an increase in value-added tax appears to be the most viable option, higher levels of public acceptance could be secured through greater transparency in fiscal policy.
In October, Bahrain announced plans to raise its value-added tax from 5% to 10% in January 2022.
This tax hike falls under the umbrella of Bahrain’s fiscal balance scheme, which was recently modified after the coronavirus pandemic halted its implementation.
Bahrain has the smallest proven oil and gas reserves among the members of the Cooperation Council for the Arab States of the Gulf, and the fact that oil prices have, most of the time, been below $80 a barrel since 2014 has led to credit rating downgrades and investor demand for financial reforms.
The decision to raise the taxes was met with an unpopular response. Many demanded the government consider alternative approaches, such as a tax on foreign transfers by migrant workers, a progressive wealth tax, and a tax on corporate profits.
These proposals sought to reduce the tax burden on low and middle-income Bahrainis at the expense of expatriates or the wealthy.
However, Bahrain’s status as a small, open economy deeply integrated with the economies of the neighbouring Gulf Cooperation Council members would undermine the effectiveness of these proposed alternatives.
Rather than getting the wealthy to pay their fair share, this is more likely to lead to capital flight, exacerbating the government’s financial problems.
This is because the wealthy are particularly adept at evading taxes by moving their money quickly out of small, open economies.
In the case of remittance taxes, although they focus on minimal capital accumulation, they would threaten Bahrain’s reputation as a financial centre that imposes no controls on capital flows, a key component of Bahrain’s strategy to attract foreign direct investment.
Although an increase in value-added tax appears to be the most viable option, higher levels of public acceptance could be secured through greater transparency in fiscal policy.
In particular, Bahrain’s successful coronavirus strategy has been built on transparent deliberations and proactive engagement with the public, and emulating these aspects in the financial arena would help Bahrain implement needed reforms more smoothly.