Bahrain implements 10 percent VAT increase amid financial woes

Bahrain has doubled its value-added tax (VAT) to 10 percent, in a bid to boost state revenues and reduce its mounting budget deficit.

The move came into effect on 1 January and saw the new VAT rate applied to non-essential goods taxable by law, according to local media reports.

Basic food products, including water, milk, bread, rice, meat and fish, oil, eggs, sugar, salt and infant foods, were excluded from the tax.

The increase came two years after the state agreed to implement a 5 percent VAT by end of 2021 to boost its economy, which was heavily impacted by the Covid-19 pandemic.

Rated below investment grade, Bahrain was bailed out to avoid a credit crunch in 2018 with a $10 billion package from wealthy neighbours Saudi Arabia, Kuwait, and the UAE.

The money was linked to a set of fiscal reforms, but the coronavirus crisis strained its finances further.

In September, Bahrain postponed plans to balance its budget by two years and announced it would increase VAT.

The increase could contribute receipts of about 3 percent of gross domestic product (GDP) in the next few years, up from about 1.7 percent this year, ratings agency S&P Global Ratings estimated, according to Reuters.

Bahrain's public debt climbed to 133 percent of gross domestic product last year, up from 102 percent in 2019, the International Monetary Fund said.

"The successful approval of the VAT increase by parliament is a critical milestone within our economic recovery plans and our aim of achieving a balanced budget by 2024," the ministry of finance said in September.