It has been nearly a year since the rollout of VAT in the UAE and Saudi Arabia, with Bahrain set to join them on January 1, 2019. 

 

When the six Gulf Cooperation Council (GCC) members signed the Common VAT Agreement of the States of the GCC in 2017, they agreed to implement value-added tax (VAT) at the unified rate of five per cent, but with varying legislative parameters for each country. This was a major step for the GCC region that had in the past levied little tax and relied heavily on oil revenues instead. 

 

The move aligns with Bahrain’s Economic Vision 2030 and is part of the country’s economic diversification plan that aims to reduce budget deficit and develop sectors including finance, real estate, oil and gas, healthcare, education and transport. Further developments in taxation can be expected, with ongoing discussions about the possible introduction of remittance tax, expat tax, corporate tax and transfer pricing across the region. 

 

There are fears that VAT will have negative implications for businesses and individuals in Bahrain. However, a broad-based VAT at a low rate is unlikely to dissuade investment in the country or the wider region, whose appeal lies in its strategic geographical location that allows easy access to every market in the Middle East.

 

Preparation is critical because VAT non-compliance could lead to severe penalties, business disruption and potential reputational risk. Companies that have been operating in a largely non-tax environment should start to prepare, analyse the impact of the new tax in detail, assess the internal systems and educate employees on the changes. It all begins with understanding the Bahrain VAT. 

 

What is VAT?

VAT is an indirect tax on the consumption of goods and services that is charged and collected by a taxable person or entity and remitted to the tax authority. It is commonly misunderstood as a tax on business, which it is not, as the businesses are only tax collectors.  

 

How will VAT work?

At present, Article 3 of the Bahrain VAT Law provides for a standard VAT rate of five per cent, while certain goods and services may be classified under zero rate or exempt from taxation. For example, supply of vacant land and buildings by way of lease or sale, necessities for people with special needs, and personal luggage and gifts carried by travellers will be exempt from VAT. 

Some of the goods and services that will be zero-rated in Bahrain include:

• Oil, gas and oil derivatives 

• Supply and imports of foodstuffs

• Transport 

• Construction of new buildings

• Supply and imports of certain medicines and medical equipment

• Supply and imports of investment gold, silver and platinum with a purity level not less than 99 per cent 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

• The first supply of gold, silver and platinum after extraction for commercial purposes

• Supply and import of pearls and precious stones (subject to obtaining a certificate)

 

The introduction of VAT certainly brings an additional layer of challenges for multinational companies, as ERP solutions will need to factor in compliance. However, VAT-compliant accounting software and ERPs enable an easy transition and help businesses manage their VAT returns, invoicing, reporting, adjustments, payments and refunds.

 

What is the tax period, and when should returns be filed?

The regulations specify the duration of the tax period, which should not be less than one month. Companies must bear in mind that the deadline for filing the VAT return is the last day of the month following the month in which the tax period ends. They also need to issue their customers tax invoices within 15 days of the end of the month following the supply date. Understanding the tax periods is very important, especially for small and medium businesses, due to the need for efficient cash flow management. 

 

Penalties or preparation?

To avoid fines, companies will need to be well-informed of the rules and deadlines. If they neglect to register for VAT, they will face penalties up to BD10,000, and failing to provide the tax authority with the required information could incur fines up to BD5,000.

 

Article 63 of the Bahrain VAT Law also stipulates that the following violations can be regarded as tax evasion and could result in imprisonment:

• 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

• Charging VAT on non-taxable items

• Unrightfully recovering input VAT

When it comes to VAT compliance, it is always better to be proactive than reactive. While it is only natural that it will take companies a while to fully comprehend the various impacts of VAT, business leaders would do well to invest in smart solutions that ensure a seamless transition. – TradeArabia News Service

* Mansoor Sarwar is regional director – technical services and pre-sales at Sage Middle East