Value-added Tax in Bahrain: a countermeasure to the oil prices crisis

It is no secret that the Kingdom of Bahrain and all of the Gulf Cooperation Council (GCC) countries in general have been probably impacted the most by the oil prices downfall back in 2014; this is because the Gulf Countries depended heavily on the oil industries in developing their economies for a long time. In the aftermath of the oil prices’ crisis, several measures have been taken to diminish the negative impact of the crisis, including levying the Value-added Taxes (VAT). The beginning of this year witnessed the levying of Value-added Tax in Bahrain.

What is the Value-added Tax?

Unlike the direct sales taxes, VAT is an indirect tax levied on each single stage of producing and distributing a product individually; it is currently levied in more than 160 countries around the globe with percentages that vary between 5% and 15%.

How is the value-added tax levied in the GCC?

In 2016, the Gulf Countries have signed a Unified VAT Agreement according to which the six member states commit to levy a 5% VAT, though the range of the products to be included or excluded from the agreement is to be determined by each state individually.

The signed agreement listed three different tax rates to be levied:

1- Basic Rate:

the 5% tax rate to be levied on products and services. Registered business owners can reclaim their input value-added tax (the tax paid by registered business owners for the provision of their goods and services).

2- Zero Rate:

In this case, the final consumer will not pay additional value-added taxes on the product they purchase. However, the owners of VAT-registered businesses can still reclaim their input value-added tax.

3- Exemption:

Goods and services that are exempted from the value-added tax in Bahrain. The difference between exempted goods and zero-rated goods is that, in case of exemption, businesses providing the goods are not required to be tax bureau-registered and, if they are, they cannot recollect their input VAT.

The Kingdom of Bahrain comes as the third Gulf Country to levy the VAT, after both the Kingdom of Saudi Arabia and the UAE have effectively levied it at the beginning of 2018.

In the following link, you can read more on the effect of the value-added taxes on the Saudi property market.

Which entities does the Value-added Tax in Bahrain apply to?

Within the first six months of levying it, the value-added tax in Bahrain will be implemented only to companies that sells goods or services to the Bahraini citizens with an annual sales value that exceeds the $13m (BD5m) mark. In the second half of 2019, the scope of the tax will also include companies with annual turnover that ranges between $1.3m (BD500,000) and $13m.

The last bracket of entities to be introduced to the VAT, on January 1, 2020,  are companies with annual sales value between BD 37.5k and BD500k.

Which goods and services will be subject to 0% VAT in Bahrain?

The following supplies and sectors will have zero-rated VAT levied on them:

• Basic foods and goods.
• Education sector.
• Healthcare sector (including medications and medical equipment).
• Real estate sector (the newly-constructed properties).
• Local Transportation sector.
• Oil, gas, and oil derivatives and industries.
• Gold, silver, and platinum with a purity level of 99 percent or more that is tradeable on the global market.
• Pearls and precious stones.
• Goods that are subjected to custom duty suspension.

Which goods and services will be exempted from VAT in Bahrain?

Before affectively levying VAT in Bahrain, the Bahraini prime minister announced that 1400 governmental services and 94 products will be excluded from the tax. The excluded products include property rentals and sales as well as financial services.

What info should be included in your business receipts?

The tax bureau obligates the registered businesses to issue receipts for their sales with the following information included:

• Business name.
• Business address.
• Business VAT number.
• Invoice issuance date.
• Invoice sequencing number
• Buyer’s name.
• Buyer’s address.
• Buyer’s VAT number.
• VAT applied to each item.
• Final value after VAT is added.

When should tax returns be filed?

As per the regulations for the value-added tax in Bahrain, the tax period should not be shorter than one month. The deadline for the tax bureau-registered companies to submit their VAT returns is one month after the end of the concerned month (e.g. the deadline for a company to submit VAT returns for April is the end of May).

Also, registered business owners should bear in mind that their customers tax invoices should be issued within 15 days of the end of the tax period.

What are the penalties of failing to meet the requirements of VAT in Bahrain?

Businesses who fall into the VAT tax brackets and fail to register for it will face penalties that can reach up to BD10,000. On the other hand, the penalty for not meeting the tax bureau requirements in time or not providing the requested information can reach BD5,000.

It is early to judge whether the value-added tax has a positive or negative impact on Bahrain’s economy; what we know for sure, however, is that it will have a significant role in the economic transformation the island kingdom is going through.

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