Value Added Tax, known as VAT, in short, is an indirect tax charged on the supply of goods and services as well on imports. In general, it is consumption tax levied on value addition in each stage of the supply chain. This is achieved through the concept of input VAT deduction which allows the business to set off the VAT paid on purchases (Input VAT) with the Vat collected on the sales (Output VAT).
Bahrain's New VAT Regime 2019
With the introduction of Value Added Tax (VAT) in Bahrain and the other Gulf countries in January 2019, Bahrain became the third country out of the six Gulf Cooperation Council (GCC) member states to introduce VAT. This was the result of the 2016 Unified VAT Agreement for the GCC states. The Agreement established the basis of a well-coordinated VAT union across the member states of the GCC. Likewise, Bahrain, along with the other states, agreed to weave the key principles spelled out by the Agreement into their domestic VAT legislation. The VAT Regime has been an interesting turn of events for Bahrain, bringing in benefits and drawbacks.
Advantages of VAT in Bahrain 2019
1. Reduces Evasion Rate and Cost
The general sales tax system depends on a percentage of the final sale of the good or service. The Government of Bahrain takes the heaviest impact when a business or individual evades axes. Bahrain doesn't see the imposition of any heavy taxes except on Oil and Gas. By placing a VAT system, avoidance of tax at any one stage does not completely avoid the tax. Not only does this benefit the Bahraini Government help see a greater amount of income than from a normal sales tax but it also gives businesses less reason to evade taxes.
2. Transparency and Neutrality
A VAT that requires the seller to put the amount of VAT already paid on the sale of receipt increases transparency. This helps tax authorities track how much VAT has been paid, and whether a business is trying to evade the tax. Because this acts as a corporate tax a VAT is much better at preventing
A VAT which obligates the merchant to add the value of VAT which has been already paid on the sale of receipt inculcates transparency. This assists the tax authority in Bahrain to track if the right amount of VAT has been paid and whether a business is plotting to dodge the tax. Since it operates as a corporate tax, a VAT averts the use of complex accounting practices to avoid paying business taxes. Since the expense is equivalent at all stages, it is extremely to lobby against the imposed rate.
3. Benefits Small Businesses
By establishing VAT, Bahrain has paved way for another remarkable advantage. Bahrain is dotted with new and upcoming businesses and VAT is especially beneficial for these small to medium sized business entities as it cloaks them with the outward appearance of being much bigger and better established. Once you have a VAT number, it will not be easy to tell if the turnover of your business exceeds the VAT registration threshold. This can give small businesses a certain appeal in the eyes of other businesses and could lead to you winning more business.
4. Exemptions and Zero Rate VAT
VAT in Bahrain was extremely well thought out, the authority identified the few business categories which will be exempted from VAT and they are:
- Financial services (except for fee-based services)
- Supply of Peer Land
- Supply of Real estate
- Imports of personal items and gifts carried in travelers' personal luggage and with foreign people coming to the Kingdom for the first time
- Importation of goods if the final destination country is exempt from VAT or subject to a zero-rate
- Diplomatic exemption as per GCC customs law
- Goods and services in the Kingdom for Military services
- Importation of requirements for people with special needs.
Businesses in Bahrain can recover any VAT they paid on costs through a zero rating. In Bahrain, the following are the zero-rate categories:
- Cross-border transportation of goods and passengers within the GCC and from/to the GCC
- Local transport
- Exports of goods or services out of implementing GCC states or non-implementing GCC states
- Gold, silver, and platinum for investment purposes
- First supply after the extraction of gold, silver or platinum
- Supply of goods to areas under customs suspension system
- Re-export of temporarily imported goods for the for the purpose of repair, maintenance or processing
- Medicines, main medical services, and medical equipment
- Education services
- Newly constructed buildings
- Petroleum, petroleum derivatives, and Gas
- Essential food items as stated under the GCC unified agreement
Disadvantages of VAT in Bahrain 2019
1. The Political Climate of Bahrain
The introduction of VAT may be a positive step forward, but in the case of Bahrain, any gains in revenue will likely be offset by elevated government spending and in a bid to limit social instability, Elevated spending, will severely decelerate improvements in Bahrain's fiscal position despite the introduction of VAT.
2. Increased Procedures in Accounting
The foremost hitch in the VAT system is the increase in the procedures of accounting a business needs to perform. Developing countries, such as Bahrain, may not have enough individuals with extensive knowledge of accounting principles to help businesses keep track of the tax. Small businesses may not be able to afford to devote resources and time to cross-checking where VAT is coming from.
3. Uncertain Outcome
VAT, single-handedly, does not have the power to increase or decrease government tax revenue. In a metaphorical sense, the implementation of VAT can have one of the two outcomes. Depending on how it's implemented, it could have any of these effects. They can greatly increase both, the income tax burden and the level of spending of the citizens in Bahrain. If VAT is instituted without the abolition of the income tax, it could potentially have the same impact in Bahrain.
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Which is the official site of VAT returns in Bahrain?
NBR Online portal (National Bureau for Revenue eService Portal).
Which are the aspects where zero VAT is applicable in Bahrain?
Basic food items
Domestic and International Transportation
Oil and Gas
Export of Goods and Services
Investment in Gold, Silver, and Platinum
Which aspects in Bahrain are exempted from tax?
Sale or lease of real estate
Certain financial services
4. How long should the accounts be maintained for VAT in Bahrain?
Accounting records and invoices associated with VAT need to be maintained for at least 5 years from the date of issue of the invoice.