All about the Basics of VAT in Bahrain: FAQs

What is a Value Added Tax (VAT)?

Value Added Tax, or VAT as it is commonly known, is a type of tax that is levied on various goods and services. VAT is levied upon a product at every stage of its production process (also known as the supply chain). Registered business owners, rather than the government, collect VAT from the consumers. This makes VAT a type of indirect tax.

When is VAT coming into effect in Bahrain?

VAT was implemented in the kingdom of Bahrain on the 1st of January, 2019. The Kingdom of Bahrain is the third of the six states under the Gulf Cooperation Council to implement VAT.

Why is VAT being implemented in Bahrain?

By implementing VAT, the Kingdom of Bahrain is following the Unified Agreement for Value Added Tax of the Gulf Cooperation Council. The UAVAT agreement was signed in 2016 and it called for a balanced VAT union across the six member states of the GCC.

How is VAT calculated?

The formula for VAT has two simple steps:

Initial Selling Price * VAT Percentage = VAT Amount

Initial Selling Price + VAT Amount = Final Selling Price

Where:

VAT Percentage is the percentage rate of VAT levied on a product throughout the supply chain process. The Standard Rate for VAT in Bahrain is 5%.

Initial Selling Price is the price that the seller sets for the product or service.

VAT Amount is the product of the Initial Selling Price and the VAT Percentage.

Final Selling Price is the sum of the Initial Selling Price and the VAT Amount.

There are some zero-rate and tax exempt products for which no tax is collected. You can read more about VAT rates here.

How does VAT work?

At each step of the supply chain, the seller calculates VAT and adds it to the initial selling price of the product to create a tax-inclusive final selling price.

Consider the following example:

VAT Return Timeline for 2019:

For businesses with annual turnover over BHD 3 million, the VAT return timeline is as follows:

• All monetary values in BHD (Bahraini Dinar)

The amount of VAT in each step is calculated using this formula.

In the first stage of the supply chain, the manufacturer of the product sells it to the wholesaler at a final selling price of BHD 1,575, after applying VAT of 5% to the initial selling price of BHD 1,500.

The wholesaler then sells it to the retailer at a final selling price of BHD 2,100, after levying VAT of 5% on their initial selling price of BHD 2,000.

In the last stage of the supply chain, the retailer sells the product to the customer at a final selling price of BHD 2,625 after adding VAT of 5% to the inital selling price of BHD 2,500.

From this illustration, we can see that VAT is applied at every stage of the supply chain. Registered business owners will receive tax credits based on the VAT they paid in the previous stage.

What is input VAT?

Input VAT is the tax added to your transaction when you purchase goods or services. Business owners who are registered for VAT can claim the input tax on goods that they sell or use to make saleable goods or services.

What is output VAT?

Output VAT is the tax that is collected by business owners during the sale of taxable goods or services to customers.

Who will be responsible for the collection and administration of VAT in Bahrain?

The collection and administration of VAT will be overseen by the National Bureau for Revenue in the Kingdom of Bahrain.

How do I calculate the total VAT payable to the Government?

The VAT amount payable to the government can be calculated with the following formula:

VAT Amount Payable = VAT Received During Sale of Goods – VAT Paid to Incur Goods

This is illustrated in the following example:

In the example shown above, the manufacturer sells goods to the business owner for BHD 6000, and the business owner pays the VAT of BHD 300.

In the next phase of the supply chain, the business owner sells the goods to the customer for BHD 7,000, plus the VAT of BHD 350.

Here, the business owner’s VAT amount payable to the Authority is calculated using the formula mentioned above:

VAT Amount Payable = 350 - 300

here, the VAT Amount Payable = BHD 50

For the manufacturer, the VAT amount payable to the Authority is calculated using the same formula, but with different values.

VAT Amount Payable = 300 - 250

here, the VAT Amount Payable = BHD 50

What are the various rates of VAT?

Value Added Tax, or VAT as it is commonly known, is a type of tax that is levied on various goods and services. VAT is levied upon a product at every stage of its production process (also known as the supply chain). Registered business owners, rather than the government, collect VAT from the consumers. This makes VAT a type of indirect tax.

There are three types of VAT rates:

1. Standard Rate: This is the basic rate of 5% that is applied to all taxable goods and services unless they are zero-rated or tax exempt. Registered business owners can claim the tax that has been paid for these goods and services.

2. Zero Rate: The Zero Rate is levied for goods and services that fall into the category of basic requirements, such as general healthcare, medical supplies, education, and basic food items. Consumers do not have to pay any tax on goods that are zero-rated. Business owners who paid VAT on these goods or services at an earlier stage of supply can claim the input VAT paid when they file for returns.

3. Tax Exempt: Tax exempt goods and services include financial services and the sale or lease of real estate. The customer does not have to pay any VAT on such goods and services.

There is a difference between tax exempt and zero-rated goods. In the case of zero-rated goods, business owners can claim the amount of tax that went into the production of the good. Business owners cannot claim any tax incurred during the production of tax exempt goods.

What goods and services fall under the standard rate?

The standard VAT rate of 5% applies to all taxable goods and services except zero-rated supplies (this includes basic requirements like healthcare, education, and basic food items) and tax-exempt supplies such as real estate and financial services.

What are zero-rated goods and services?

There are certain goods on which 0% VAT is applied. On such transactions, the end consumer will not pay any tax, and the business owners can reclaim any tax paid on the goods or services. The zero rate applies to goods that are considered basic requirements.

Supplies that are zero-rated are:

1. Local transportation
2. Real estate (sale of new buildings)
3. Basic food items
4. Pharmaceuticals and medical supplies
5. Propellants such as gas and oil

What are tax-exempt goods and services?

These are supplies for which there is no tax charged, and registered business owners cannot reclaim any tax paid on them.

Some examples of tax-exempt goods and services include:

1. Lease or sale of real estate (residential and commercial buildings)
2. Financial services
3. Bare land
4. Charitable Services

Do I have to pay VAT on goods that I import?

Yes, all imported goods are subject to Value Added Tax.

What kinds of imported goods are exempt from VAT?

Goods that are imported into the Kingdom of Bahrain are exempt from VAT if they are:

1. Goods that are exempt from taxes or zero-rated in the Kingdom of Bahrain.
2. Special needs equipment.
3. Diplomatic and/or military equipment.
4. Personal luggage and household appliances brought by citizens residing abroad who are going to reside in the Kingdom of Bahrain for the first time.
5. Imports of returned goods.
6. Personal items and/or gifts in travellers’ luggage.

Will the implementation of VAT affect my cost of living?

The impact of VAT varies from person to person, since every individual’s spending methods and income range is different. If a person tends to spend more on zero-rated and exempt goods, then they will not experience a huge change in their cost of living. Alternatively,if a person tends to spend primarily on general products that are taxed, they will experience a minor increase in their cost of living.

Are Customs Duty and VAT the same?

No, Customs Duty and VAT are not the same. VAT is a mandatory tax that is paid to the government, while Customs Duty is paid only for the goods that you import. A key difference is that VAT is charged at a standard rate, whereas the charges for Customs Duty are variable.