Bahrain’s parliament has agreed on the foreword of 5 percent value-added tax (VAT) in the kingdom from January 1, 2019. Value added tax (VAT) is not just accounting or tax confront. It impacts each fraction of the business with a view to cash flow, costing of capital, pricing of products and services, financial reporting, tax accounting, compliance processes, supply chain, procurement and contracting, and all technology at present facilitating this network. Adding together, there will be important preparation requirements for human resources to understand and operate effectively under a VAT regime
Basics of indirect taxation
Taxes are a classically key foundation of revenues for Governments across the world. Taxes can be ‘direct’ taxes or ‘indirect’ taxes.
Direct taxes are taxes which are levied and collected directly from the person, company, firm etc. Taxes such as Corporate Tax is an example of Direct Tax.
Indirect taxesare levied and collected from consumers through manufacturers, traders or service providers. Herein, the Government collects the taxes through manufacturers, service providers, traders than the person who bears it ultimately (i.e. consumer), and thus it is called as ‘Indirect Tax’. In a legal sense, the responsibility to pay an indirect tax rests with the manufacturer/ seller/ service providers though, finally, the tax is collected from the consumer
Introduction to VAT
The VAT is an abbreviation for Value Added Tax. In few countries, VAT is also known as Goods and Service Tax (GST). Value Added Tax is levied on activities such as ‘supply’ of goods and services. The VAT is a consumption-based tax wherein the basic principle is to tax the value addition at each business stage. To achieve this, tax paid on purchases is allowed as a set off/ credit against liability on output/income.
Each time goods/ services substitute hands, usually, they are subjected to VAT. The VAT is imposed on all deal of goods and services. Thus, in principle, VAT should not distinguish between ‘goods’ and ‘services’ (though VAT law might lay down split consign of supply/ time of supply provision for goods and services). Internationally now more than 160 countries have introduced VAT. Most of the countries, depending on their own socio-economic formation, have introduced Single VAT (like UAE).
GCC was established in May 1981.GCC population is 55 mn (of which more than 51% are expatriates).Combined GDP of GCC is $ 1,390 bn. Estimated VAT revenue of GCC is around $ 20 bn.
Six Member States have signed GCC Unified Agreement on VAT. This Agreement is expected to align the VAT laws in GCC, though, GCC States retain their flexibility in VAT laws. In the last ten years, the matter was being discussed in GCC whether confidence should be shifted to non-oil i.e. tax revenues. This query concentrate distinction after it was being revealed that in years to come revenues from oil and gas may reduce whereas public expenditure may increase.
Thus, to ensure that there is no fiscal deficit, revenue from VAT was explored. Now, after deliberations in last few years, VAT (@ 5%) is introduced in UAE has introduced VAT from 1st January 2018. A chief motive for a logical rate of VAT (i.e. 5%) is the reality that till now, GCC countries had huge revenue from oil and thus there was no tax in GCC.
Main characteristic of VAT:
Other 4 Countries of GCC are likely to introduce from the end of 2018 or early 2019. Bahrain – Bahrain Parliament has approved VAT Agreement1. And implemented VAT from 1st January 2019. Certain this, it is very important to recognize VAT if one wishes to take this chance to understand what the potential scenery offers and how to make most of it.
Details one ought to be familiar about VAT
As VAT has persistent contact on businesses, it is vital for businesses to be aware of a broad outline of VAT.
a.) The VAT is payable on the supply
The VAT is imposable on every taxable supply and deemed supply made by a taxable person. Thus, in the VAT regime, all ‘supplies’ be it a sale, transfer, barter, lease, import of services etc. of goods or services are subject to VAT. Typically, VAT is taxable on a supply made for consideration, however, the VAT law may charge VAT on definite supplies made without consideration, such as the use of business assets for purposes other than business.
b.) VAT payable as per time of supply
The liability to pay VAT will arise at the time of supply as determined for goods and services. In this regard, break up provisions, characteristically, stipulate what will be the time of supply for goods and services. Further, the GCC VAT Agreement considers payment of VAT at the original date of issuance of invoice or receipt of consideration. Additionally, there could be special provisions for supplies of a recurring character or constant provisions. Given that there could be a compound constraint in influential ‘time’ of supply, maintaining reconciliation between revenue as per financials and as per VAT could be a major challenge to address for businesses.
c.) Shaping Place of Supply might be the decisive factor
In VAT law, determining the place of supply is significant as if it is decided that supply is made within a country’s jurisdiction then in such case VAT becomes applicable. In this regard, the GCC VAT Agreement provides separate provisions which help a consultant conclude the place of supply for goods and services. Normally, for ‘goods’ the place of supply would be shall be in the State if the supply was made in the State, and does not include Export from or Import into the State. Whereas for ‘services’ the place of supply could be either the Place of Residence of supplier or recipient. Further, VAT Law generally recommends compound circumstances wherein the aforementioned common ideology will not be appropriate and explicit necessities will settle on the place of supply. Thus, in VAT regimes, businesses are expected to scroll through all the place of supply provisions before determining the place of supply.