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Input Value Added Tax (VAT) deduction forms the core aspect of VAT in Kingdom of Bahrain

Value Added Tax (VAT) has been implemented in in the Kingdom of Bahrain from 1 January 2019. This tax regime differs from corresponding legislation in UAE and Saudi Arabia in some key areas. In addition, the concept of input VAT deduction is the core aspect of VAT in Bahrain. Input VAT deduction is a mechanism by which a VAT registered person can deduct input tax from the output tax for a period and only remit the balance tax payable to the Government.

While Bahrain VAT law allows the registered businesses to claim input VAT deduction, businesses will not be allowed to claim all purchases or expenses. The eligibility to claim input VAT deduction depends upon the nature of use. As such, if a company purchases certain items, of which few are sold to a customer, while the remaining are kept for personal use, the company can recover input VAT only on items that are sold to customers and not the non-business use items. For businesses to recover input VAT, the purchases or expenses should be used in making taxable supplies. As such, the purchase or expenses should be directly or indirectly used in supplying the goods or services which are taxable at 5 percent or zero-rated. In case, the purchase or expenses used in supplying goods or services which are exempted from VAT or used for non-business purpose (personal purpose), will not be allowed to recover the input VAT.

The supply of goods or services which are exempted from the VAT are supply of financial services, supply of bare land and buildings, some imported goods including –selected military goods, used household items brought by citizens residing overseas or foreigners entering the Kingdom for the first time to reside, returned goods, personal items and gifts in travellers personal luggage and special needs equipment as specified in the VAT regulation.


“Considering the introduction of VAT brings forth a requirement for businesses to maintain their business records in an organized manner, it is recommended that they seek professional assistance to manage invoicing, reporting, adjustments, VAT returns, payments and refunds,” said Mr. Tejas Goenka, Executive Director, Tally Solutions.

“When it comes to VAT compliance, it is good to have a hands-on approach. This will not only help the businesses of Bahrain to learn quickly about the key areas of VAT but will also help them comprehend it’s impact. We encourage and recommend all business owners to take the help of smart solutions that ensure a seamless transition to VAT in the coming year,” added Mr. Goenka.

Most VAT consultants and chartered accountants recommend using Enterprise Resource Planning software, which are easy to use and can assist in creating invoices, managing inventory and adhere to compliance challenges. This automated software can also record transactions relating to a range of business scenarios such as discounts, freight charges, foreign currency transactions, exports, as well as self-account for VAT on reverse charge, input tax credit and advance receipts. The advantage of automated software is that it has the unique capability to detect errors and mismatches between transactions and configurations. Hence, businesses can not only be sure about transactions, but are ready for audits at any time.

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