Are you an entrepreneur? If yes, then you must be starving for more insight on the coming VAT legislation and have tons of questions trying to figure out how it’s going to impact you, your business and your customers.
Well, before you dive and continue reading, please note that I am not a lawyer, legal consultant, government official nor have previous experience in dealing with VAT other than paying it whenever I shop in countries where it is applicable. And everything written here is based on my understanding of the answers i received, except the quoted parts which are copied and marked clearly.
On the 25th of July, I attended KPMG Start-up Majlis for 2 hours in their office at Fakhro tower, and I had the opportunity to get many questions answered to the best available knowledge of VAT legislation to date by Mr. Sumit Pandey “ Senior Manager, Owner Managed Business”, Mr. Ali AlMahroos “Senior Manager, Tax and Corporate Services” and Mr. Jayadeep Jayaprakash “Assistant Manager, Enterprise”, and for simplicity, I’ll be sharing them in bullet-point style to keep it short and to the point.
- VAT in Bahrain delayed until mid of 2018 (The VAT framework agreement obligates all GCC countries to implement VAT within a period of 12 months from the first GCC country’s implementation. And since Saudi and UAE will start it on the 1st of January 2018, then other GCC countries will have to follow before the end of December 2018).
- All prices shown to customers must be VAT inclusive. You can’t show the original price and add the tax at checkout or at the POS system.
- VAT invoices apply only to corporate clients, as it’s needed to claim their VAT payments
- You as a business must collect VAT invoices for everything you pay to be able to claim that VAT payment later
- Rentals are considered services, and they are taxable too
- VAT is not applicable and not chargeable to government entities, however, if you are selling online and do charge it, then it is the government entity’s responsibility to claim it back from you and request the invoice to be corrected.
- Legal registration and TAX registration are two different things. By not being registered in a GCC country, you are still required to collect the VAT and pay it to the GCC country where the goods or services were consumed.
VAT registration requirements will also apply to non-resident entities:
- VAT is applicable for all products and services and the only exceptions are the items specified by the government which are about 29 products in Bahrain and for those items they are exempted. Note that each GCC country could have different list of the exempted items.
- More clarifications and regulations are expected to be rolled out in the coming months for online retailers
A simple transaction example:
If a business buys or imports a Camel worth BD 100 “assuming animals are taxable at 5%” and sells it to a happy customer, the scenario would be:
- Business pays: cost of camel (BD 100) + VAT (BD 5)
- Business collects VAT invoice (BD 5)
- Customer pays to buy the camel: Cost + profit (BD 150) + VAT (BD 7.5)
Business VAT obligation to government:
VAT (BD 7.5) — VAT (BD 5)= VAT (BD 2.5)
Business margins are not affected in this case.
If Camels are TAX exempted:
- Business pays: cost of camel (BD 100) + VAT (BD 5)
- Business can’t claim VAT exempted items
- Customer pays to buy the Camel: Cost + profit (BD 150) + No VAT
Business VAT obligation to government: VAT (BD 0) and cannot claim the VAT paid when buying the Camel, and hence business margins are affected negatively
I hope this helps and provides more answers to you questions the way it did to me. For more info, Please see quotes below from KPMG report and follow the link for more details.
Zero-rated supplies include:
- Medicines and medical supplies (a common list will be proposed by the committee of Health Ministers and endorsed by the Financial and Economic Cooperation Committee)
- Certain foodstuffs (a common list will be ratified across the GCC by the Financial and Economic Cooperation Committee)
- The oil sector and the oil and gas derivatives sector (at the discretion of each member state)
- International and intra-GCC transport
- Means of transport (at the discretion of each member state)
- Supply outside the GCC (for example, exports)
- Supply of precious metals for investment (gold, silver and platinum)
- Additionally, each member state can zero rate or VAT-exempt:
- The educational sector
- The medical sector
- The real estate sector
- The local transport sector
- VAT exempt supplies
Financial services performed by authorized banks and financial institutions will be VAT-exempt. Banks and financial institutions will have the right to a refund of input tax, based on refund rates determined at the discretion of each state. Each member state has the discretion to apply other tax treatments to the financial services sector.
The international practise in many VAT jurisdictions is to treat the education and medical sectors, the leasing of residential property and local transport as VAT exempt. However, this has been left to the discretion of each member state.
What are the consequences of making something VAT-exempt or zero-rated?
A VAT rate of zero is still a rate of tax and a taxable supply. A supplier of zero-rated goods or services is entitled to a credit for the VAT incurred on his or her costs. In sharp contrast, VAT exempt is not a rate of tax and not a taxable supply. As a consequence, suppliers of VAT-exempt supplies cannot claim credits on the VAT incurred on their costs. This will result in higher costs for VAT-exempt suppliers.
