Almost a year after its introduction in the UAE and Saudi Arabia, value-added tax (VAT) was officially introduced in Bahrain on January 1, 2019 in accordance with the 2017 Unified Agreement for Value- Added Tax of the Cooperation Council for the Arab States of the Gulf.
The legal framework for VAT, an indirect tax on consumer spending which forms part of Bahrain’s Economic Vision 2030, is set out in Royal Decree No. 48 of 2018, supplemented by Resolution No. 12 for of 2018 on the issuance of the Executive Regulations of the Value Added Tax Law, issued under Law No. 48 of 2018 (VAT Law).
Similar to the VAT frameworks in other GCC member states, the application of VAT extends to goods and services made or rendered within Bahrain, as well as to imports, and shall be applied at the standard rate of 5%, unless the law provides for a specific exemption from the same. A National Bureau for Revenue (NBR) has also been established and is responsible for the implementation and administration of VAT in Bahrain.
It is important to note that the year 2019 is a transitional year for VAT in Bahrain. Specific rules have been put in place to this effect until December 31, until which suppliers of goods and services shall enjoy the flexibility of a temporary increase to mandatory VAT registration thresholds, a three-phased mandatory VAT registration deadline depending on the value of goods or services supplied, longer tax reporting periods and special treatment for taxable transactions entered into prior to 2019.
From January 1, 2020 the permanent legal framework governing VAT in Bahrain will be implemented in its entirety. VAT applies at a prima facie rate of 5% on the supply of goods and services, if such supply is made:
• By a taxable person (i.e. a person or business who supplies goods and services, or receives goods or services from a non-resident in accordance with the reverse charge mechanism, or is an importer);
• In Bahrain; and
• The supply is not specifically exempt from VAT or subject to the zero-rate.
In order to prepare for the introduction of VAT, all taxable persons as described above should perform a preliminary estimate of their expected annual revenue for each commencing year, then apply to the NBR for VAT registration within 30 days, if the expected values of their annual supplies exceed the applicable mandatory threshold. From 2020, such threshold shall be set at BHD37,500 ($99,500).
Any VAT collected on the supply of goods and services must be retained by the supplier and subsequently paid to the NBR within 30 days of the end of each tax period. VAT invoices must also be provided to customers of the supplier within 15 days of the end of each tax period. Taxable individuals and businesses should ensure they are well prepared for these time frames in order to allow for sufficient cash flow and compliance with the law.
Certain goods and services are exempt from VAT, either through the application of a 0% VAT rate or by total exemption. In such cases, no VAT is chargeable by the supplier nor payable to the NBR. For example, the sale or lease of vacant land and buildings, goods and services for disabled persons, and gifts carried by travelers will be exempt from VAT.
Other goods and services may be subject to VAT at a rate of 0%, including:
• Oil, gas and oil derivatives;
• The supply and imports of food products;
• Construction of new buildings;
• The supply and import of certain medicines and medical equipment;
• The supply and import of investment gold, silver and platinum with a purity level not less than 99% that is tradeable on the global bullion market (subject to obtaining a certificate);
• Educational services, as well as the supply of related goods and services to nurseries, pre-schools, primary, secondary and higher education institutions;
• Supply of goods under a Customs duty suspension scheme; and
• The supply and import of pearls and precious stones (subject to obtaining a certificate).
Penalties for non-compliance are severe, and taxable individuals are advised to ensure they understand all the VAT obligations and time frames relevant to their situation. Taxable suppliers who fail to register for VAT may face penalties up to BD10,000 ($26,500). A penalty of up to BD5,000 ($13,300) may be imposed on any person who:
- Prohibits employees responsible for implementing the law to be carried out;
- Fails to notify the NBR of changes to details of information;
- Fails to display prices of goods or services inclusive of VAT;
- Fails to provide information at the NBR’s request;
- Fails to comply with conditions related to issuing the tax invoice;
- Violates any other provision of the VAT Law.
In addition, the following actions may be regarded as tax evasion, which may result in a period of imprisonment in addition to any fines imposed:
• Failing to register for VAT within 60 days of the registration deadline;
• Failing to pay VAT within 60 days of the payment deadline;
• Failing to provide a tax invoice to a customer; and
• Charging VAT on non-taxable items.
Implications of VAT for Businesses
Following the introduction of VAT, further developments in taxation in Bahrain may be expected in the coming years in furtherance of Economic Vision 2030, including the possible introduction of remittance tax, expatriate tax and corporate tax.
The introduction of VAT and other taxes will no doubt present challenges to businesses of all sizes, however, small and medium-sized enterprises who do not have a dedicated accounting department should be especially rigorous when it comes to familiarizing themselves with the VAT rules and deadlines, and in implementing the necessary internal systems to ensure compliance with the same at all times.
(This article was published on Oxford Business Group The Report: Bahrain 2020 Edition)