BIZ BAHRAIN JAN-FEB 2020_compressed

Bahrain VAT | Tally
Bahrain VAT:
What is Reverse Charge
Mechanism?
by CA Manu Nair
The Reverse Charge Mechanism is
one of the important aspects of
the value-added tax (VAT) law in
Bahrain and it is one of the key elements
that attracts numerous questions.
Queries range from ‘how it applies’ to
‘what is the impact’ and ‘whether it is a
cost to my business?’
For proper compliance, businesses
must ensure that they fully understand
this mechanism to guarantee correct
compliance, especially among small
businesses in the country.
If a business in Bahrain is buying
goods, the supplier normally adds
the corresponding VAT amount to the
total price of the purchased items. The
supplier is then liable to pay VAT to tax
authorities.
Under the Reverse Charge
Mechanism, the rule is different. The
buyer, instead of the supplier, charges
VAT on itself when, say, importing goods
or availing of services from abroad.
Hence, the buyer of goods or services
becomes responsible for paying VAT to
tax authorities rather than the supplier.
For example, you are importing
goods worth BD 1 million from outside
the GCC. Customs duty assumes 5
percent, or BD 50,000. The standard 5
percent VAT will be charged on the BD
1.05 million, which comes to BD 52,500/.
When you import, you pay the amount.
However, since you are using the goods
for your business, you are eligible to
claim input credit during the filing of
your tax return. Under this scenario, you
are still not losing any money. But you
still need cash flow to import the goods
since input credit can be claimed only
when you file your tax return.
When you import goods from the
UAE, however, you don’t need to pay
VAT at the time of import. It is declared
instead as payable to the authority. You
only pay when you file your tax return.
In short, under Reverse Charge
Mechanism, you are charging VAT on
yourself and paying the amount to the
authority. But since you are eligible to
claim input credit, you can recover the
amount 100 percent. Hence, it’s not a
cost to your business.
Another interesting VAT aspect
involves businesses that are not yet VAT
registered.
In Bahrain, companies with turnover
of above BD 500,000 but below BD 5
million should have registered by the
middle of 2019, while small companies
are mandated to register before the year
ends. Since registration takes place in
various stages, there are cases that some
unregistered companies are already
paying VAT. The question is, can they
claim the VAT they paid before their
registration? The answer is, yes, they can
claim the VAT amount paid prior to the
VAT registration, through their first VAT
return, provided those goods are used for
taxable supplies.
Suppose you purchased goods in
January 2019, when VAT in Bahrain
has become effective. You paid the
corresponding VAT amount even though
you have yet to be registered. If those
goods are sold to the customers after you
have registered, they are considered as a
taxable supply, and hence you can claim
input tax. If you sold those goods before
your tax registration, you are not entitled
to claim input tax.
On services, if you pay VAT for
services before your registration, you
can make a claim, provided you incur
some expenses within six months before
the date of registration. For example,
suppose you are going to register under
VAT by 1st January 2020, you can claim
input credit for the expenses incurred
from 1st July 2019 until December 31,
2019, in your first return.
For proper VAT compliance, it is best
to register within the given timeframe.
CA MANU NAIR
For Tally’s VAT
knowledge series
‘Let’s Talk VAT
24 January-February 2020