24/12/2018 07:28 AST

The introduction of value added tax (VAT) in Bahrain next year is an excellent opportunity to build a unique and optimised taxation system and blockchain technology will be a safe and effective tool for its management, said an IT industry expert.

Blockchain speeds up government access to tax revenues from the final consumer of the service or Item, and also accelerate the process of refunding the merchant and supplier of the tax, stated Yaqoob AlAwadhi, the chief executive of NGN International, a full-fledged systems integrator and IT consultant based in Bahrain.

With the help of blockchain, we can shape a prudent structure even at early stages, leveraging all the best that innovations can give us, stated AlAwadhi. "This technology would contribute to reducing the costs of managing the VAT and accelerate its collection by 80 per cent," he added.

Al Awadhi pointed out that Bahrain had a good opportunity to be a pioneer in the GCC of by using blockchain in the collection of VAT as this technology eliminates the role of intermediaries such as accounting companies or banks between the merchant and the government.

"There are estimates that this tax will help boost state budget by BD300 million ($793 million) per year, thus contributing 1.6 per cent of GDP. However no one wants the cost of collecting this tax to be greater than its revenues through hiring of more staff and spending on consulting firms, or through deliberate or unintentional tax evasion," stated Al Awadhi.

According to him, the blockchain technology has been expanding its influence over the last few years. "Since 2008, when blockchain appeared to ensure highly secure crypto currency transactions, this technology has evolved dramatically and is now used in multiple areas, such as network administration, copyright and ownership, digital identity, energy, e-voting, and private and public sector management. We believe blockchain to be a great aid for taxation system," he added.

Blockchain’s key strength, he stated, was its secure and transparent nature. "Anyone interested can see a chain of blocks with transaction details but changing, adding, or removing of any block is not possible," he added.

Unlike electronic tax invoices, which are entered into a database and can be exposed to third-party interference, blockchain is free from such vulnerabilities. The system can track VAT-related financial flows and monitor the fulfillment of taxpayers' obligations in real time, with no chance for fraudsters to conceal any transaction or get an illegal VAT refund or offset.

Blockchain is intensively being adopted for VAT collection in Kazakhstan where the government decided to move the entire taxation system to blockchain by 2020 in order to combat various tax evasion schemes. For some taxpayers, the system will go live as early as in 2019, revealed Al Awadhi.

In addition, the Ministry of Finance is going to establish a single business account for each company to be also used for tax and customs payments. Such enterprise blockchain will enable the government to monitor enterprise activities and get information about expenses, profits, and budgets.

In this scheme, blockchain nodes will be located in banks and government agencies. These bank nodes will keep a limited amount of information that is not enough to identify transaction details, while the nodes kept by government agencies will get transaction details in full.

"Yet there are other benefits," stated the top IT consultant. "Blockchain is quick (mind digital transformation hype) and can cut VAT administration costs by eliminating the need for third-party intermediaries: agents, escrow, trusted banks, and many others that slow down the entire transaction process," he explained.

"Blockchain can do the job in minimum time and without contractors. Compared to any digitalization initiative, blockchain prevails thanks to its highly secure transactions," he added.

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