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A Complete Guide to the VAT in Bahrain

About VAT in Bahrain

VAT, or Value Added Tax, is an indirect tax that is levied on all taxable goods and services. Registered sellers will collect VAT from buyers on behalf of the government, which makes it an indirect tax.

The Kingdom of Bahrain will be the third GCC country, following the UAE and the Kingdom of Saudi Arabia, to implement VAT. Even though the basic framework of the law will remain the same, there are a few key differences that will set Bahrain’s VAT law apart from the other countries. For instance, Bahrain will impose zero-rated tax on basic food items, education, 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 Implementation: January 1st, 2019

VAT Collection and Administration Authority: The National Bureau for Revenue in the Kingdom of Bahrain

How does VAT work?

Let’s use an example to understand how VAT works.

Seller and Buyer Cost Price VAT on Sales (5%) Selling Price
Manfucturer 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.

VAT Rates

The different VAT rates applicable on 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 rate: 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 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 are required to pay VAT?

The following persons are required to pay tax:

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 a 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.

Deemed supplies

Any supply of goods or services that falls under any of the following scenarios is considered a deemed supply:

Components of Supply

Any supply under VAT has three components: place, value, and time. These are used to calculated the tax owed for a transaction.

Place of supply

This component tells you whether the supply is made inside or outside the Kingdom of Bahrain for tax purposes.

Place of supply for goods

The place of supply for goods will be the Kingdom of Bahrain in the following cases:

Place of supply for services

If the taxable supplier resides in the Kingdom, the place of supply for services will be the Kingdom. In cases where the customer is a taxable, registered person from another VAT implementing state, then the place of supply will be the place where the customer resides.

Place of Supply for Other Services

The location of supply for other services will be based on the following criteria:

Place of import

The place of import will be the Kingdom if the following criteria are met:

Time of supply

This component determines when the tax will be due and which VAT period the transaction falls under.

Scenario Date of supply
Goods transferred under the supervision of the supplier Date on which the goods were transferred
Goods transferred without the supervision of the supplier Date on which the customer takes ownership of the goods
Goods that require assembly or installation Date on which the goods are assembled or installed
General services The date on which the services were completed.

Time of supply for goods and services in specific cases

For any supply in which goods or services are provided on a contractual basis, where there are periodic payments to be made or consecutive invoices to be issued, the time of supply will be the earliest of the following dates, provided it does not exceed 12 months from the date of supplying the goods and services:

Value of supply

This component is used to determine the amount of tax that has to be paid for a supply.

Value of supply for goods and services

The value of supply is calculated based on the total amount due for a supply, exclusive of tax. This amount includes all expenses, fees due, and excise tax. Here is how the value of goods and services is determined in a few specific cases.

Value of supply for imported goods

The value of goods imported into the Kingdom will be the customs value determined by the Unified Customs Law, plus any applicable excise taxes, custom duties, and other duties, except VAT.

Adjustments to value of supply

If any of the circumstances mentioned below occurs after the date of supply, the value of supply can be adjusted.

Registration

For the purpose of VAT registration, the turnover shall include taxable turnover (taxed at either 5% or 0%) and the turnover on which VAT is payable under reverse charge mechanism (import of goods and services).

Mandatory registration

A resident taxable person must register for VAT if they fulfil any of the following conditions:

Registration timeline

The timeline for registration for businesses is based on the annual turnover in sales.

Annual Turnover in Sales Must Register By VAT Effective From
More than BHD 5 million 20th December, 2018 1st January, 2019
Between BHD 0.5 million and BHD 5 million 20th June, 2019 1st July, 2019
Between BHD 37,500 and BHD 0.5 million 20th December, 2019 1st January, 2020

Voluntary registration

A resident taxable person can register for VAT from 1st of January, 2019 if they fulfil any of the following conditions:

Registration for non-residents

According to the VAT law, a non-resident supplier is a business owner who does not reside in Bahrain but makes taxable supplies in Bahrain.

It’s mandatory for non-residents to register for VAT in the Kingdom of Bahrain, irrespective of the value of their supply. A non-resident can either register directly or appoint a tax representative to register on their behalf after getting the Authority’s approval.

Non-residential business owners in Bahrain must register before their first supply after January 1, 2019. They may register for VAT themselves without appointing tax representatives.

Who can register as a tax group?

Two or more legal taxable individuals can apply for registration as a tax group. The members of the tax group will be liable for all tax obligations that arise from the group’s activities. The Authority can adjust or de-register a tax group based on the terms, conditions and procedures mentioned in the Regulations.

Exemption from registration

If an individual’s supplies are all zero-rated, they can be exempted from mandatory registration upon request to the Authority.

Deregistration

A taxable person should deregister if they are no longer carrying out an economic activity or if they’ve stopped making taxable supplies in the past 12 consecutive months. They will also be eligible for deregistration if the value of their taxable supplies for the previous 12 months falls below the voluntary threshold and is not expected to exceed the voluntary threshold for the next 12 months.

A taxable person can choose to apply for deregistration if the value of their annual taxable supplies for the past 12 months falls below the mandatory threshold of BHD 37,500 but exceeds the voluntary threshold of BHD 18,750.

Transitional Provisions

What are transitional provisions?

Since this is the first time an indirect taxation method is being implemented in the Kingdom of Bahrain, the tax authority has established certain provisions to make it easy for businesses to transition to VAT.

Transitional provisions for supply of goods and services

If a supply is made after January 1, 2019 or after the date of registration, it is considered taxable even if the invoice and/or payment were completed before either of those dates.

If a taxable supply is completed after an invoice has been issued without tax, then the supplier should issue a tax invoice that is inclusive of the VAT amount charged on the supply.

The date of supply is considered to be after January 1, 2019 in the following cases:

Transitional provisions for contracts exclusive of tax signed before January 1, 2019

If a contract has been signed before January 1, 2019 and the supply is made completely or partially after VAT has been implemented, then the supply is taxable (unless the contract already includes a tax clause).

In cases where a contract has been signed with the government before January 1, 2019 and the supply is made completely or partially after VAT has been implemented, then the supply is considered zero-rated. It will continue to be zero-rated until the renewal or expiry of the contract or December 31, 2023 (whichever comes first).

Invoicing under VAT

Issuing a tax invoice

A taxable person must issue an original tax invoice for any goods and/or services supplied by them. This includes deemed supplies and invoices issued to record complete or partial payments received before the date of supply.

The date of issuing a tax invoice

A supplier must issue a tax invoice by the 15th day after the end of the month in which the supply took place. For example, if a supply took place on January 31, 2019, then the tax invoice must be issued before February 15, 2019.

Currency used in a tax invoice

The base currency of the tax invoices should be Bahraini Dinars (BHD). For supplies made in foreign currencies, the value of supply should be converted to BHD based on the daily conversion rate prescribed by the Central Bank of Bahrain for the date of supply.

Contents of a tax invoice

A tax invoice should contain the following details:

Note: A tax invoice should be issued within 15 days of supply of the goods and/or services.

Amendments to a tax invoice

A taxable person can make adjustments to the value of supply in the following ways:

Both documents are given the same treatment as an original tax invoice.

Returns

Tax period for VAT returns

The Regulations will determine the duration of the tax period for a taxable person, which should not be less than one month. The start and end dates of each tax period will differ for each taxpayer.

Submitting VAT returns

A taxpayer must submit a VAT return to the Authority by the last day of the month following the end of each tax period. This VAT return will contain details regarding the supplies and imports made and received by the taxpayer in that tax period.

A taxpayer should submit a VAT return even if they haven’t made or received any supplies or made any purchases during the tax period.

VAT return timeline for 2019

VAT return timeline for businesses with annual turnover above BHD 5 million

First tax period Filing frequency Due date for filing return
January 1, 2019 - March 31, 2019 Quarterly End of the month following the tax period

VAT return timeline for businesses with annual turnover below BHD 5 million

Tax period Filing frequency Due date for filing return
From January 1, 2019 to June 30, 2019 6-month tax return End of the month following the tax period
From July 1, 2019 - September 30, 2019 Quarterly End of the month following the tax period
From October 1, 2019 - December 31, 2019 Quarterly End of the month following the tax period

VAT Return Timeline for 2020

Annual turnover Filing frequency Due date for filing return
Greater than BHD 3 million Monthly End of the month following the tax period
Lesser than BHD 3 million Quarterly End of the month following the tax period

Amendments to VAT returns

The taxpayer should notify the Authority if they need to make any changes in a tax return. The changes made in the tax return should comply with the procedures, terms, and controls specified in the Regulations.

Accounts and Records

A taxable person must maintain organised records, tax invoices and accounting books related to their supplies and imports of goods and services for at least 5 years from the end of the year in which they were issued.

For real estate properties, the invoices, records, and accounting books must be maintained for at least 15 years.

The taxpayer must retrieve and present these records and books to the tax authority upon request.

Tax payments and Refunds

After submitting tax returns, the taxable person must pay the amount due to the Authority.

An importer must pay the tax due to the Ministry of Interior’s Customs Affairs department, if the first entry point of goods is considered to be the Kingdom. The Authority can allow a taxable importer to defer tax payments on imported goods that will be used for economic activity. In this case, the taxable importer must declare the deferred tax while filing VAT returns.

When imported goods are under customs duty suspension, the tax will be suspended. In this scenario, the importer must provide a financial guarantee equivalent to the tax value.

Refund and adjustment of tax

Tax will be refunded on a supply or import under any of the following circumstances:

The tax will be refunded only when the conditions of recovery are met.

Carrying forward excess recoverable tax

Tax authorities can carry forward any excess net tax to subsequent tax periods at the request of the taxable person.

The tax authority can use the excess net tax to offset administrative penalties or any tax due from a taxable person, until the excess value is exhausted.

Penalties

An administrative penalty is imposed on taxpayers who commit any of the following acts:

For any person who commits the following offences, a penalty of BHD 5000 will be imposed:

Tax evasion

The following offences are considered tax evasion and carry more significant penalties:

Penalties for tax evasion

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