VAT is a reality for Bahrain – the question now is ‘when’, not ‘if’. How might VAT affect demand for your products or services? What should retailers do?
How might the lead-up to VAT implementation affect consumer demand?
Business leaders in Bahrain have expressed concern around the challenges of getting ready, as well as how VAT might affect their bottom-line. VAT implementations in Saudi Arabia, the UAE and Malaysia suggest retailers in particular have a lot to do when it comes to calculating prices and anticipating demand in the lead-up to implementation.
Why does VAT affect retail businesses?
Demand for business-to-business goods and services tends to be less affected by VAT, since VAT-registered businesses are generally able to recover the VAT they incur on business-related expenses. From a VAT-registered business customer’s perspective, there is no real incentive to defer or accelerate purchases if incurred VAT can be recovered anyway.
However, that isn’t true for businesses that sell to end consumers. Because they can’t recover incurred VAT, that VAT “sticks”.
How will the introduction of VAT affect consumer demand?
Any change in price can alter demand for products. The implementation of VAT is perhaps slightly different as the date and the impact on prices will be known. Generally, the implementation of VAT is likely to affect demand for higher value items such as vehicles, luxury products and electronic or electric products as consumers try to avoid VAT by buying these items before the tax is introduced.
Similar increases in demand can affect long-life household essentials as consumers try to avoid higher sticker prices by stockpiling these items prior to VAT’s introduction.
Demand for some products – essentials and perishable products such as groceries – are relatively unaffected by the implementation of VAT as these products either need to be bought frequently or cannot easily be stockpiled.
What should retailers do?
Assess your products and services. Anticipate how the lead-up to the implementation of VAT might affect consumer demand. Ensure you have appropriate levels of stock. Once you have identified which of your products and services will be standard-rated (subject to VAT at five percent), consider how you want to adjust your pricing– it is not simply a binary decision of BD100 or BD105 on the first day.
Having an experienced VAT adviser – in particular a VAT adviser who has worked on implementations in the retail sector – will give you an edge when making these strategic business decisions.
If you’d like to talk to us about how Keypoint might assist you with VAT preparation, including strategies in the lead-up to introduction, please contact us.