Bahrain Value Added Tax

 

Bahrain VAT

 

About Value Added Tax(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 Gulf Taxation in the Kingdom of Bahrain

How does VAT work?

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

  • A manufacturer sells goods to a wholesaler at BHD 1000. Under the new law, a VAT of 5% will be applicable on these goods. So, the wholesaler pays BHD 1050.
  • The wholesaler increases the price to BHD 2000 to include a profit margin and sells it for BHD 2100, after adding 5% VAT.
  • Finally, the retailer increases the price to BHD 3000. After levying 5% VAT on the goods, he sells it for BHD 3150.
Seller and Buyer Cost Price VAT on Sales (5%) Selling Price
Manufacturer 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:

  • A taxable person who sells goods or services in the Kingdom of Bahrain.
  • A taxable customer who buys goods or services in the Kingdom of Bahrain from a non-resident supplier under the reverse charge mechanism.
  • All importers who are declared by the Unified Customs Law must pay tax on importation.
  • Every person who issues invoices with tax amounts in the Kingdom of Bahrain.

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:

  • When goods that are part of a person’s assets are used or surrendered for non-business purposes.
  • When goods intended for a different use are used for making supplies that are non-taxable.
  • When goods are still owned on the date of deregistration despite stopping all business activities.
  • When goods are given away for free and are not used as samples or gifts for business purposes. These goods must be within the threshold specified by the Regulations.
  • When a supplier provides services for free.

Components of Supply

Any supply under VAT has three components: place, value, and time. These are used to calculate 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:

  • Goods sold to customers within the Kingdom without transportation or dispatch.
  • Goods dispatched or transported from the Kingdom by the supplier to the customer.
  • Goods assembled or installed in the Kingdom.
  • Internal goods supplied by a registered supplier (or a supplier who must register) to a taxable recipient in the Kingdom.
  • Internal goods that are transferred from the Kingdom without assembly or installation to a VAT implementing state. Here, the supplier must be a taxable person in the Kingdom and the customer must be a non-taxable person from a VAT implementing state. The value of the goods must not exceed the mandatory threshold in any twelve consecutive months.

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:

  • If the supplier does not reside in the Kingdom, then the place of supply will be the place where the taxable customer resides.
  • If a taxable supplier leases transport to a non-taxable customer, then the location where the transport is placed at the customer’s disposal will be the place of supply.
  • The place of supply for the following services will be location where the service is performed:
    • Restaurants, hotels, catering services, cultural services, artistic services, sports services, educational services, recreational services.
    • Services involving transportation of goods from a taxable supplier who resides in the Kingdom to a non-taxable customer residing in a VAT implementing state.
  • For real estate services, the place of supply will be the location of the real estate.
  • The place of supply for services related to transporting goods or passengers will be the place of origin of the journey.

Place of import

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

  • The first entry point of goods imported to the Council is the Kingdom.
  • The place of release of imported goods after customs duty suspension is the Kingdom.

Time of supply

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

  • VAT will be due on the earliest of the following: the date on which the goods or services were supplied, the date when the tax invoice was issued, or the date on which partial or full payment was received.
  • The date of supply of goods or services will be based on the following criteria:
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:

  • The date on which the tax invoice or similar document is issued.
  • The payment due date mentioned on the tax invoice.
  • The date on which the payment was received.
  • If payment is made through a vending machine, the time of supply will be the date on which the funds are collected from the machine.
  • For deemed supplies of goods or services, the time of supply will be the date on which the goods or services were supplied or disposed. This is applicable when the usage of goods changes, and when a business deregisters.
  • For goods that attract custom duties, the time of supply will be the date on which the customs duties are due, or the date on which they were supposed to be due, depending on the provisions of the Unified Customs Law.
  • For vouchers, the date of supply will be the date on which the voucher was issued, or the supply was made.

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.

  • If the supply is exchanged for a monetary consideration, the value of supply is the amount paid by the recipient, minus VAT. If the supply is exchanged for a non-monetary consideration, then the value of supply is calculated based on any monetary value paid plus the fair market value of the non-monetary consideration, inclusive of all fees, expenses, and excise tax.
  • For those transactions where the reverse charge mechanism is applicable, the value of supply will be the purchase price. If the purchase price cannot be determined, then the fair market value on the day the supply was made will be considered as the purchase price.
  • If part of the consideration is not related to the supply of goods and services, then the value of supply will be equal to the part of the consideration that is related to the supply.
  • For deemed supplies, the value is calculated based on the purchase value, or the actual cost of goods or services supplied. If neither of these values can be determined, the fair market value of the goods or services must be used.
  • The value of supply can be subject to discounts, deductions given to the customer, or subsidies granted by the Kingdom to the supplier.
  • The value of vouchers is determined based on the difference between the consideration received by the supplier who issues the voucher, and the nominal value recorded on it.
  • In any tax period, a taxable supplier can calculate the value of supplies of certain taxable goods by using the profit margin mechanism. This may be done only after getting the Authority’s approval.

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.

  • The supply is cancelled or rejected wholly or in part.
  • The supplier provides a discount on the value of supply.
  • The consideration is not collected fully or in part, in accordance with the terms applicable for bad debts.
  • The goods or services are returned to the supplier, provided the supplier agrees.
  • There is a change or a fundamental adjustment in the nature of the supply which can increase the value of tax due on it.

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:

  • If the total value of the supplies, they made in the Kingdom of Bahrain exceeds the mandatory threshold of BHD 37,700 in the twelve months before the end of any months in 2018.
  • If the value of the supplies, they made in the Kingdom of Bahrain is expected to exceed the mandatory threshold in the next 12 months.

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:

  • If the value of supplies, they made in the previous 12 months exceeds the voluntary threshold of BHD 18,850.
  • If the value of supply is expected to exceed the voluntary threshold in the next 12 months.

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 37,700 but exceeds the voluntary threshold of BHD 18,850.

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:

  • If the goods are delivered on a date after January 1, 2019
  • If the services are completed after January 1, 2019

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:

  • The date on which the invoice was issued (the date of supply should be mentioned if it’s different from date of issuance)
  • Invoice number (The series should be sequential, and each invoice should have a unique number)
  • Name and address of the supplier
  • Tax ID number of the supplier
  • Name and address of the customer
  • Description and quantity of the goods supplied/ Nature of the services provided
  • Gross and net values of the supply
  • VAT applicable on the supply (include explanation if standard rate is not applied)

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:

  • If the tax amount specified in the original invoice exceeds the actual value, the taxable person should issue a credit note.
  • If the tax amount specified in the original invoice is less than the actual value, then the taxable person should issue a debit note.

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:

  • Tax paid in excess by a taxable person
  • Tax paid for goods and services supplied inside the Kingdom by foreign governments, international organisations, and diplomatic and military missions.
  • Tax paid in another VAT implementing state for business purposes by a taxable person from the Kingdom.
  • Tax paid by tourists

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:

  • Delayed submission of VAT returns or delayed payment of tax, for a prescribed period not exceeding 60 days. The penalty rate in this case would be between 5% and 25% of the tax value to be recognised or paid.
  • Failing to register for VAT within 60 days from the registration deadline, or within 60 days after reaching the mandatory registration threshold limit. The penalty in this case may go up to BHD 10,000.
  • Providing falsified information on the import of goods and services that leads to an increased value declared in tax returns.

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

  • Not informing the Authority of changes in a registration application or changes in VAT return information within specified dates.
  • Not displaying the price of goods or services inclusive of tax.
  • Failing to provide information requested by the Authority.
  • Not complying with the rules relating to issuing a tax invoice.
  • Violating any rules or regulations of VAT law.

Tax evasion

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

  • Failing to register within 60 days from the last date to register for VAT.
  • Failing to submit tax returns or pay tax due on supplies or imports within 60 days from the due date.
  • Unlawfully deducting input tax and making tax adjustments, or violating the provisions of input tax deductions.
  • Unlawfully claiming tax partly or wholly.
  • Submitting forged or falsified documents, records, or invoices in order to partly or wholly avoid paying tax.
  • Not issuing tax invoices for taxable supplies of goods, services or imports.
  • Issuing tax invoices for non-taxable supplies.
  • Not maintaining organised documentation and accounting books related to tax invoices, imports, and supplies of goods or services.

Penalties for tax evasion

  • The standard penalty for tax evasion is a prison sentence between 3 to 5 years. Along with this sentence, the offender will have to pay a fine for an amount that is not less than the tax amount due, but can be up to 3 times the tax amount due.
  • The penalty will be doubled if the tax payer evades tax again within 3 years from the date of the first verdict.
  • A legal person will have to pay a penalty if their name is used for tax evasion purposes or for their benefit fraudulently or illegally. The fine will be double the amount of the normal penalty fees (which range between 5% and 25% of the tax value to be recognised or paid).
  • Transport tools, materials, and devices used for tax evasion purposes may be confiscated by the Authority. Ships and aircrafts will also be confiscated if they have been prepared and used for tax evasion purposes.
  • Tax evasion crimes are considered with the same sense of seriousness and urgency as other crimes of dishonour and dishonesty. No criminal action can be taken in tax evasion cases without the request of the Ministers or his authorised representatives.
  • The Minister or his authorised representatives may reconcile some of the penalties wholly or partly. In order to do this, the accused or their representative must send a written request to the Minister or his authorised representatives before the litigation, during the trial, or before the final verdict on the case. If the accused pays an amount equivalent to the minimum amount of the decided penalty, in addition to the tax due, the Ministers may agree to a reconciliation. Once reconciliation is reached, it marks the end of the criminal proceedings.