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VAT Basics


VAT Basics

The implementation of VAT in the Kingdom Bahrain makes it the third of six GCC countries to adopt the concept of VAT. This guide covers ground on the basics of VAT including insight into how its implementation affects consumers and businesses alike.

The basics section of the guide will cover the following topics:

What is VAT or Value Added Tax?

Value Added Tax is a form of tax that is levied on goods and services that are taxable. VAT is imposed on a product for all the stages of its supply chain process. This type of tax is borne by the end consumer, and is paid to the government by registered businesses. Since business owners pay this tax to the government on account of the consumer, VAT is considered to be a form of indirect tax.

The Mechanism of VAT

Note: The manufacturer, wholesaler and the retailer can get a refund on the amount of VAT paid while purchasing goods for their businesses.

Supply Chain Initial Selling Price* (in BHD) VAT Amount (5%)* (in BHD) Final Selling Price* (in BHD)
Manufacturer to Wholesaler 1,500 75 1575
Wholesaler to Retailer 2,000 100 2100
Retailer to Customer 2,500 125 2625

In the example illustrated above, it is clear that VAT is applied at every stage of the supply chain process. Registered businesses also receive a refund of the amount of VAT paid on the previous step. The Standard Rate of VAT in the Kingdom of Bahrain as regulated by the NBR (National Bureau for Revenue) is 5%.

Why is VAT implemented in the Kingdom?

The GCC region has always been a low-tax environment. However, to adapt to the changing economic landscape, the Kingdom of Bahrain, along with the remaining 5 states of the GCC signed the Unified Agreement for Value Added Tax of the Cooperation Council (UAVAT) for the Arab States of the Gulf agreement in 2016 which called for a unified VAT implementation across all 6 member states.

The implementation of VAT also allows the Kingdom of Bahrain to split and allocate funds for ensuring even better standards of living of all its citizens particularly in the healthcare, education, and the public transportation sector to name a few. The implementation of VAT in Bahrain is expected to produce revenues of around (BHD 214 million in the first year.)

VAT Registration in the Kingdom

Registering for VAT in the Kingdom of Bahrain can be either mandatory or voluntary. The registration for VAT is carried out in a phased manner and the dates for the mandatory registration and voluntary registration of VAT varies depending upon their annual turnover in sales.

Rates of VAT

There are three types of VAT rates that apply to all goods and services that are considered to be taxable. They are:

Standard Rate

The standard rate VAT of 5% applies to all goods and services as long as they do not fall into the zero rate and tax exempt category.

Zero-Rate

Zero-rated goods consist of goods and services that fall into the basic requirements category. Zero-rated goods are not taxable by law. A 0% VAT is imposed on these goods and services. This means that customers who purchase these goods and services do not have to pay tax. For example, manufacturers who make zero rate goods, and business owners who sell these goods are permitted to claim the amount of VAT that went into the production and procurement of these items.

Some examples of zero-rated goods and services are:

Tax Exempt

Tax exemption applies to goods and services that are not taxed. Customers who buy these goods and services do not have to pay tax. The concepts of tax exempt and zero rate may appear to be similar, but there is one key difference. While businesses can claim the amount of money that goes into the production of a good in the case of zero rate goods and services, the same does not apply to goods and services that fall into the tax exempt category. Businesses cannot claim the amount of tax that went into the production or procurement of tax exempt goods and services.

Some examples of tax exempt goods and services are:

Recordkeeping

The implementation of VAT will definitely require proper maintenance of records. While it is mandatory for businesses that are VAT registered to maintain records of accounts, it is also advisable for businesses that are not registered for VAT to do the same. Accounts and records would be required at any point in time by the Government to check if the respective business needs to be registered for VAT.

All registered tax persons would need to maintain the following records:

Tax Invoices
Accounting records and invoices associated with VAT need to be maintained for at least 5 years from the date of issue of the invoice. For VAT records related to real estate properties, the invoices and accounting records need to be maintained for 15 years.

The Tax Invoice must contain the following details:


Credit Notes
If goods have been returned to the retailer by the customer for a refund or the amount mentioned in the invoice has been increased, or if the retailer must issue a refund to a customer, a Credit Note is issued. A credit note is a record that is sent by the retailer to a consumer stating that the amount that is to be refunded has been credited to the consumer for the goods that have been returned to the retailer.

Debit Notes
A debit note is issued to formally fix wrongly stated values on invoices. For example, if a product costs BHD 500, and the seller wrongly records on the invoice that the product was sold for BHD 400, then a debit note of BHD 100 has to be issued by the seller to the customer.

Issuing Credit or Debit Notes:

While issuing credit or debit notes, the registered taxpayer must ensure the inclusion of the following information:



       
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