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:
- VAT Basics
- How VAT Works?
- The Need for VAT in Bahrain
- VAT Registration
- VAT Rates
- Issuing Credit or Debit Notes
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
How does VAT work?
VAT is applied to every single stage of the production process and is borne by the end consumer. To get a brief overview of how VAT works, consider the following example:
Say there are four entities, the Manufacturer, the Wholesaler, the Retailer, and the Consumer.
A manufacturer who is in the business of producing mobile phones sells a fully manufactured mobile phone to a wholesaler at BHD 1500. The VAT levied upon the wholesaler by the manufacturer is BHD 75, because of the Standard Rate of VAT which is 5%. The wholesaler buys the mobile phone for the final amount of BHD 1575.
The wholesaler then ups the price of the mobile phone to BHD 2000 and sells it to a retailer at a final price of BHD 2100 after adding 5% Standard Rate VAT which comes up to BHD 100.
The retailer sets the price of the mobile phone at a price of BHD 2500 and sells it to the consumer at a final price of BHD 2625 after adding a 5% Standard Rate VAT of BHD 125.
The consumer pays a total amount of BHD 2625 for the mobile phone in the last step of the supply chain process.
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.
Mandatory Registration for VAT
The following table states the annual turnovers of businesses that would have to register for VAT in Bahrain mandatorily.
Annual Turnover in Sales Must Register By From BHD 37,500 to BHD 500,000 December 20th, 2019 From BHD 500,000 to BHD 5,000,000 June 20th, 2019 More than BHD 5,000,000 December 20th, 2018
Non-residents who own and run a business in the Kingdom of Bahrain are expected to register for VAT regardless of the value of their supplies.
Voluntary Registration for VAT
Business owners have the option of voluntarily registering for VAT. Businesses can voluntarily register for VAT if the total value of their supplies and annual turnovers in sales are either expected to cross a value of BHD 18,750 in the 12 months from the date of implementation, or have already crossed a value of BHD 18,750 in the previous 12 months. Hence, these business owners are allowed to register for VAT any time after the 20th of December, 2018, when the transitional period takes place.
The VAT in Bahrain will be coming into effect on the 1st of January, 2019. To register for VAT, you can register through the NBR website, here.
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:
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-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:
- Medical Supplies
- Basic food items
- Domestic and International Transportation
- Oil and Gas
- Export of Goods and Services
- Investment of Gold, Silver, Platinum
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:
- Sale or lease of real estate
- Certain financial services
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
- Credit Notes
- Debit Notes
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:
- The title must be “Tax Invoice” and this must be stated clearly.
- The name, residential address, and the registration number of the registered tax person.
- The details of the customer, such as name and address.
- Details regarding when the tax invoice was issued, i.e. the date. The invoice must also include the date of supply and the date of payment if they differ from the date of issue of the tax invoice.
- The invoice number that is sequential.
- A brief description of the goods that have been supplied.
- The invoice must contain the value of supply and this must be written in Bahraini Dinars, with the individual unit price that is exclusive of tax.
- If the good has an amount of discount applied to it, this must be stated and the product’s net value of supply, all in Bahraini Dinars.
- The number of goods that have been supplied.
- The rate of tax that applies to the product and its amount.
- The total amount that is due on the goods’ supply, inclusive of all taxes. This must be stated in Bahraini Dinars.
- If a currency other than Bahraini Dinar is used, the exchange rate of the currency must be stated.
- If the tax has been calculated based on the profit margin mechanism, its explicit reference must be stated.
- If a transaction has been exempt from tax, its explicit reference must be stated.
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.
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:
- “Credit Note” or “Debit Note” must be stated in words in the document.
- Details of the registered taxpayer such as name, address and their Registration Number.
- Details of the customer such as name, and address.
- A credit or debit note number that is sequential.
- The date when the credit or debit note was issued.
- The number stated on the original tax invoice, or the original document that states the nature of the adjustment.
- The changed value of the supply and the amount of tax that is to be adjusted in BHD (Bahraini Dinars).