The concept of VAT is new to the GCC and Bahrain and this was mostly the huge first tax introduction conducted in Bahrain in terms of tax on goods and services where the effects have spread the businesses and the customers. In this context, for a better understanding of tax, you may have some understanding of the basic concepts of VAT in GCC and Bahrain here.
The wide division of taxes in GCC
Across the world, taxes are classified into two that are Direct Taxes and Indirect Taxes. Direct taxes are those in the form of personal income tax or corporate income tax. When a person or a company makes an income, a part of it in the percentage threshold is paid in return to the government. In companies, part of the profit is paid as tax in the form of direct tax. The second type of tax is Indirect tax which is in the form of tax on goods and services such as VAT, GTS, excise, etc.
The method of direct tax is that the tax load is on the person or the corporate who makes a profit out of their business or professional services. This is called direct tax because this is directly recognized by the person who makes revenue. Whereas it comes in Indirect tax the tax there are two levels of people one on whom the tax load is and the other is the entity that is responsible to collect the tax and remitted to the customer.
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So in this tax, the tax is charged to the supplier of goods and services. Ie, the tax is collected and paid by the entity that take on the task of supplying goods and services. But the tax load is on the end customer who actually pays for the goods and services. So the supplier passes on the tax to the customer.
In the case of VAT, the vat is charged on goods and services which are purchased by the customer they pay the tax and the supplier of goods and services collects it and remits it to the Federal Tax Authority. So the business is an intermediary to the government in terms of indirect tax.
ADMINISTRATION OF INDIRECT TAX :
Indirect tax can be managed in multiple technologies which are dependent on the objective of the Government. Whether it is needed for cover the entire economy or a particular segment, does it aim to tax all or does it aim to tax a particular class of people or business and so on, does it aim to control a specific sector of the economy? The model is selected on the target which the Government aims to achieve.
The basic models are
Single point VAT system and Multipoint VAT system based on value addition.
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THE OBJECTIVE OF GOVERNMENT THROUGH INDIRECT TAX CAN BE:
Generate revenue for infrastructure and social welfare which is one of the objectives of the GCC and Bahrain by implementing VAT to reduce the financial burden of the government for finding out the fund for free services to the public such as health, education, transport etc.
Ensure development of the economy across the states and provinces. In some centralized economy, some states or provinces get backward in development. The revenue from the VAT can be deployed into the weaker sections of the country.
The indirect tax also helps to regulate the manufacture, supply, and sale of goods and services in the economy. By indirect tax, the government regulates the consumption of particular goods and services in the market. Such as if the government would like to regulate luxury and guide the public to lead a simple life, the indirect tax on luxury items is set high in that countries. And the essential services and goods are promoted to use and manage to simplify so tax is controlled to zero rates or exempted. Such as education, health care transport, etc.
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Regulate the movement of goods and services within and outside the country. Based on the tax policy and strategy the government can decide which are critical goods and services which must stay within and which need to be transported. If the government wants to control certain goods not to go outside the export duty is high.
So the whole idea of implementing VAT is to strengthen the economy of the country and make discipline the consumption of goods and services inside and outside the country. And it is to be kept in mind that no business loses its profit from paying VAT but the burden is on the end customer. If the business itself plays as an end user then they are also owed to pay the tax.