What is VAT? The VAT is an indirect tax applied upon the consumption of most goods and services.
Registered sellers will collect VAT from buyers on behalf of the government, which makes it an indirect tax. The VAT is levied by VAT registered businesses which make supplies of goods and services in the course or furtherance of their business. The VAT will also apply to the importation of goods. The VAT is levied at each stage in the supply chain and is collected by businesses on behalf of the Government. The VAT is ultimately incurred and paid by the end consumer. Although VAT will apply to most goods and services there are some likely exceptions: this includes basic food items, essential medicines, and exports of goods and international services which are expected to be zero-rated supplies. Furthermore, other supplies such as healthcare, education, sale or lease of residential property and finance and insurance are expected to be exempt from VAT.
The Kingdom of Bahrain the third GCC country, following the UAE, to implement VAT. Even though the basic agenda of the law continues the same, there are a few chief distinctions that will set Bahrain’s VAT law separately from the other countries. For example, Bahrain enforced the zero-rated tax on basic food items, education, and health, construction of new buildings, local transportation, oil, and gas. Certain supplies related to real estate and financial services will be VAT exempt.
Date of Implemented: January 1st, 2019
VAT Collection and Administration Authority: The National Bureau for Gulf Taxation in the Kingdom of Bahrain
Main thoughtfulness when getting on upon a VAT performance project is:
• Struggle for assets within the business, as the VAT completion project may correspond with other revolution projects intended for the business.
• The accessibility of in-house resources such as project managers, business analysts, IT and others needs to be evaluated early.
• An early on a review of the requisite and accessibility to power external resources (such as VAT specialists, IT systems and business analysts as well as project management consultants); upon which the necessary resources should be procured early.
• An early assessment of an impact the introduction of VAT may have on your cross border transactions and GCC trade as well as any impact on pricing, customers, vendors, intermediaries, capital expenditure planning and your supply chain
How does VAT work?
How does VAT work? A VAT registered businesses charge and add VAT to the value of goods and services they supply. Such businesses can also reclaim VAT incurred on goods and services acquired for business purposes (subject to some restrictions) such as the purchase of raw materials and other consumables used for the purposes of business. For imports, VAT is charged at the first point of entry into home consumption (when customs duty may also apply).
Let’s use an example to understand how VAT works.
• A company sells goods to a trader at BHD 1000. Under the new law, a VAT of 5% will be applicable on these goods. So the wholesaler pays BHD 1050.
• The merchant increases the price to BHD 2000 to include a profit margin and sells it for BHD 2100, after adding 5% VAT.
• At last, the dealer increases the price to BHD 3000. After levying 5% VAT on the goods, he sells it for BHD 3150.
Seller and Buyer Cost Price The VAT on Sales (5%) Selling Price
manufacturer to Wholesaler BHD 1000 BHD 50 BHD 1050
Wholesaler to Retailer BHD 2000 BHD 100 BHD 2100
Retailer to Consumer BHD 3000 BHD 150 BHD 3150
From this example, we can see that VAT is levied at every stage of the supply chain until it reaches the consumer.
The different VAT rates applicable to taxable goods and services in Bahrain will be as follows:
Standard rate: 5% tax will be levied on the total value of all taxable goods and services unless they belong to a zero-rated or tax-exempt category. Registered business owners can recover the tax paid on these goods and services (which is known as input tax).
Zero rates: 0% tax will be levied on the value of certain goods and services, including basic food items, education, health including pharmaceuticals and all medical supplies, real estate (construction of new buildings), local transportation, and oil and gas (and their derivatives). Registered business can recover the tax paid on these goods and services. The final consumers will not pay any tax since the VAT rate is 0%.
Tax Exempt: If goods or services are considered tax exempt, then the consumer will not pay VAT, and the registered business owners cannot recover the tax paid on these goods and services. Some tax-exempt supplies include the lease or sale of real estate, and financial services (excluding explicit fees, commissions, or commercial discounts charged by financial institutions).
Who is required to pay VAT?
The following persons are required to pay tax:
• A taxable person who sells goods or services in the Kingdom of Bahrain.
• A taxable customer who buys goods or services in the Kingdom of Bahrain from a non-resident supplier under the reverse charge mechanism.
• All importers who are declared by the Unified Customs Law must pay tax on importation.
• Every person who issues invoices with tax amounts in the Kingdom of Bahrain.
Supply under VAT
The government has defined supply as any exchange of goods or services including production, sales, purchases, and leasing transactions for a consideration.
Supply of goods
Any transfer of ownership or the rights to use goods is considered to be a supply of goods.
Supply of services
If supply is not considered a supply of goods, then it is considered to be a supply of services.
Supplies made or received on behalf of a taxable person
If a person supplies or receives goods or services on behalf of someone else, then the person supplying or receiving will be considered the supplier or recipient of the goods or services.
Any supply of goods or services that falls under any of the following scenarios is considered a deemed supply:
• When goods that are part of a person’s assets are used or surrendered for non-business purposes.
• When goods intended for a different use are used for making supplies that are non-taxable.
• When goods are still owned on the date of deregistration despite stopping all business activities.
• When goods are given away for free and are not used as samples or gifts for business purposes. These goods must be within the threshold specified by the Regulations.
• When a supplier provides services for free.