Complex Made Simple

Bahrain VAT is here and with it a period of confusion and penalties

Bahrainis splurged on TVs, cars, and jewelry, among other last minute shopping items before VAT went into effect in the country on Jan 1st, 2019.

Little did they know that unless they take delivery of these items before the Jan 1st deadline, they would still have to pay VAT, even if items were purchased beforehand.

These are just a few of the things that could go wrong with end users and businesses who now have to deal with a 5% levy that will complicate what was otherwise a pretty straightforward retail/business world.

Who should pay what and when, what is the impact on consumers and what penalties are involved?

AMEinfo has done the research.

But first…

The retail rush

Sales of cars at dealerships and jewelry in Bahrain have reportedly surged by up to 40% in the last days of December, according to reports.

Local Bahraini media reported that retail shops, furniture stores, and consumer electronics have also seen a spike in demand for TVs, home theatre systems, digital cameras and furniture.

Ernst & Young (EY) Middle East and North Africa VAT implementation leader, David Stevens, told GDNonline that a spike in consumer spending before the VAT deadline had been expected.

But will this be followed by a slowdown in buying?

Read: What a metro could mean for Bahrain’s future

Bahrain shopping festival

Bahrain can expect to receive an influx of tourists over the next month as the kingdom’s largest shopping festival starts next week with a unique line-up of events, according to Trade Arabia

Starting from January 1 until February 2, the fifth edition of Shop Bahrain is set to be the biggest nationwide festival, with more than 32 hotels and 24 shopping malls across the kingdom are taking part in the mega event.

The event will kick-start the country’s robust 2019 tourism calendar and will include different promotions and activities such as the ‘Festival City’ at the Bahrain International Circuit.

Offsetting any hangover from the realization that more retail outlets will now charge Bahrainis a 5% VAT, a loyalty system will also be reintroduced where shoppers can earn points every time they spend at participating hotels and shopping malls to be able to enroll in raffle draws.

“For every BD10 ($26.3) spent, shoppers will be eligible to enter a raffle draw and win more than 73,000 prizes including 11 cars, electronics, 6,000 airline tickets at special rates from Gulf Air, thousands of instant prizes and much more,”  Shaikh Khaled bin Humood Al Khalifa, chief executive of the Bahrain Tourism and Exhibitions Authority, said.

He also said that the expected roll-out of Value Added Tax (VAT) from January 1 “would not majorly impact consumer spending.”

The total volume of transactions during the 2018 edition was BD19 million ($50 million).

But according to the head of consultancy EY’s VAT advisory services, consumer spending will dip and price inflation will rise in the immediate aftermath of the introduction of value added taxation (VAT) in Bahrain.

Speaking to Bahrain-based Gulf Daily News, EY’s top regional VAT consultant David Stevens said the period before and after the implementation in 2019 would mimic how VAT affected economies in the UAE and Saudi Arabia.

“Decline in spending post-implementation will come about as a result of increases in prices,” according to Stevens.

What do businesses need to be ready for?

Read: Expats love Bahrain, but country’s economy teetering on the edge

Qualifying businesses, deadlines, fines

Last December, Bahrain’s Ministry of Finance announced that VAT will be introduced in a phased manner through transitional mandatory registration thresholds, consultancy PwC revealed, as reported by Gulf Business.

According to the regulations, businesses earning over BD5 million ($13.2million), will have to be registered by January 1, 2019, while those making over BD500,000 ($1.3 million) and BD37,500 (over $99,730) have to be registered by July 1, 2019, and January 1, 2020, respectively.

Those wishing to voluntarily register in 2019 must exceed the voluntary registration threshold of BD18,750 ($49,860).

According to PwC, large businesses will file tax returns on a monthly basis and all other businesses will file quarterly. Tax returns will be due on the last day following the month of the end of the tax period.

Read Update: Bahrain approves VAT after $10.2 bn financial aid

Mansoor Sarwar, Director of Technical Services and Pre-Sales at Sage Middle East says:

“With the introduction of VAT in the UAE and Saudi Arabia in 2018, we rolled out tax-compliant software in the GCC region to help businesses adapt seamlessly to the new accounting procedures. We have tailored our products to suit each country’s VAT law and are currently customizing our software solutions to comply with the Bahrain VAT laws as more details emerge.”

He continues: “The implementation of VAT presents an ideal opportunity for companies to invest in accounting solutions that streamline the tax collection, record-keeping, and reporting processes. Our products integrate all the elements that a startup, a small or medium-sized business, or a large enterprise needs to run with the utmost efficiency and flexibility.”

Bahrain’s VAT law also states that the penalty for tax evasion is imprisonment and a fine. Administrative penalties will also apply in case of specific violations, such as the late submission of a VAT return or failure to register for VAT. Similarly to Saudi Arabia and the UAE, penalties will either be a percentage of the tax or a fixed penalty.

According to EY, The law outlines the penalties that could be imposed for non-compliance and include failing to register for VAT (up to BHD10,000, or $26,523) and failing to
provide the tax authority with information it requests (up to BHD5,000, or $13,260).

Under Article 63, the following violations could 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
• Failure to provide a tax invoice
• Charging VAT on non-taxable items
• Unrightfully recovering input VAT

The regulations contain certain “business-friendly” provisions aimed to reduce the burden of VAT on businesses and certain taxpayers, PwC stated.

These include:

•Tax invoices being acceptable in Arabic or English

•The acceptance of a bank statement as a valid tax invoice, subject to some minor amendments.

•Provisions allowing businesses to apply to defer the payment of VAT on imports of goods to their next tax return.

•Provisions allowing businesses who export more than 50% of their turnover and who expect to be in a regular VAT refund position to request that the domestic reverse charge mechanism will apply on certain local purchases.

However, the consultancy also warned that VAT will still be complex for certain sectors, particularly financial services and real estate.

“As with most countries with VAT, banks and financial institutions will make both taxable and exempt supplies, and great care will be needed to compute the recoverable input tax correctly,” it stated.

What do end users need to be aware of?

Read: Bahrain is splurging on crypto, garnering global attention

Exempt items

People are exempted from paying VAT on certain basic necessities and utilities such as basic food items, drinking water, preventive and basic health care, medicines, and others which have been zero-rated.

There are 94 food items on zero-rated VAT list, according to GDNonline.

International travel, which includes any passage originating or terminating in Bahrain would be zero-rated as well, according to Al Bawaba.

Image Courtesy of PwC

Read S&P banking industry country risk assessment: Bahrain is high risk

Further, import of personal items and gifts carried as personal luggage will be exempted from VAT. Tourists have the benefit of claiming refunds of the VAT paid on goods purchased in Bahrain at the time of leaving the kingdom.

The purchase of gold and silver jewelry and the charges paid for the making of the jewelry would be subject to VAT, but pearls and gemstones are, at least for now, exempt from VAT.

Bahrain has opted to make the Education Sector Zero Rated under the VAT regime.

PwC says in a report that “the construction of new buildings, local transport services, as well as oil and gas and derivatives, are exempt from VAT” it said.

“The sale and lease of real estate as well as certain financial services (ie those with an implicit fee) and life insurance/reinsurance will be exempt from VAT,” the report said.

Bahrain has also exempted from VAT the sale and lease of residential and commercial real estate, as well as certain financial services such as loans.

Read: Bahrain port IPO with Nov 24 deadline is at $1.75 a share

Not exempt items

Though the rent payable on residential property would be exempt from VAT, the rents are still expected to increase marginally on account of it. This is because the input VAT paid by property owners on maintenance, consumables and so on would not be recoverable and would add to their costs.

According to Albawaba, while the interest and financing cost payable with the periodic EMIs (An equated monthly installment) on loans would also be exempt, any other bank charges which are in the form of explicit fee or commercial discount such as credit card charges, processing fee would be subject to VAT as charges of this nature have been specifically excluded from the exemption.

VAT will be applied at a standard rate of five percent on telecommunications services, clothing and apparel, hotels and restaurants, and vehicles.

“Financial services provided for an explicit fee including account management, certain trade finance services, and fund management will be subject to standard rate VAT. Standard rate VAT will also apply to non-life insurance/reinsurance,” the PwC report added.