More than 166 of the world’s 193 countries use value added tax (VAT) and as of the New Year, the kingdom will also be joining the financial fray.
Bahrain will soon become the third of the six Gulf Cooperation Council (GCC) member states, after the UAE and Saudi Arabia, to introduce the consumption-based tax placed on goods and services.
The GCC signed a 2016 Unified VAT Agreement to keep up with the changing economic landscape and as part of wider development reforms.
According to experts at KPMG Bahrain, which is the first national auditing firm established in the kingdom in 1968 by Jassim M Fakhro and Hussain Kasim, the implementation of VAT will have implications for businesses and individuals, both in Bahrain and abroad, directly and/or indirectly.
Philippe Norre, partner and head of tax at KPMG in Bahrain, caught up with GulfWeekly to share his thoughts on how VAT will affect the business owner as well as the consumer and what to expect.
Impact of VAT on Companies
With a week to go before the implementation of VAT in Bahrain, all companies, big and small, are bracing themselves for the changes that are required to happen.
Any individual or business with annual sales above BD37,500 would be mandated to register for VAT purposes and be subject to various compliance requirements prescribed under the VAT law. These would include issuing tax invoices, filing of periodic returns, paying taxes to the government before the due date of payment, maintaining proper books of accounts as required by law to name a few.
It is critical for businesses to understand that while VAT is a tax which is ultimately borne by the end consumers, the responsibility to collect and discharge VAT to the government lies with the business making the taxable supplies. While there may be a cost associated with ensuring compliance with the VAT law, the fact is that the penalties associated with non-compliance are significantly high and in some cases may involve criminal prosecution. The good news is that the initial rate of VAT in Bahrain (like other GCC States) is five per cent which is one of the lowest VAT rates in the world.
Certain supplies would not be subject to VAT on account of exemptions and zero rating. For example, tax at the rate of zero per cent would be applicable on international transport of goods and passengers, construction of new buildings, supply of oil and oil derivatives etc. Additionally, zero rate would also be applicable to any supplies made to a government authority under an existing contract. However, the zero rating on the government contracts would only be available up to the date of expiry/ renewal of such contracts or December 31, 2023, whichever is earlier. Businesses engaged in making zero rated supplies would need to ensure that they appropriately record and recover any tax paid by them on their procurements and claim a refund of the same to keep their costs low.
However, any businesses engaged exclusively in making supplies which are exempt (distinct from zero rated supplies) would not be able to recover any input tax incurred by them on their procurements. This would add to their costs and in turn reduce margins. In other words, while such businesses will not charge tax on supplies made by them, any VAT charged to them by their suppliers would be added to their costs as they are non-recoverable.
In Bahrain, financial services, where consideration is not payable as an explicit fee, commission or commercial discount and sale/ lease of land and buildings would be exempt. Though the VAT legislation does not make a distinction between commercial and residential buildings for a differential VAT treatment, the executive regulations would need to be examined to determine if the exemption applies to commercial buildings.
Another aspect of the VAT legislation which may be unpleasant for many businesses is that the price agreed under an existing contract, which is silent on VAT, would be deemed to be tax inclusive. Simply put, under such contracts, the supplier would not be able to recover the tax due from the customer and would have to bear the amount of tax by skimming his margin. Therefore, businesses must actively review their contracts and identify contracts without a tax clause and communicate appropriately with their clients.
It is a well-known fact that any proposed change is met with resistance. Therefore, it would be critical for management teams of businesses to ensure that such change is managed and the staff is made aware of the changes on account of introduction of VAT and their role and responsibility in ensuring compliance with the VAT law. Contrary to the general understanding, VAT will not only impact the finance function of an organisation, but all the other functions too, such as, Procurement, Admin, Legal and IT.
For instance, the role of the IT/ ERP teams becomes highly critical in a successful implementation of VAT as they are the ones responsible for making changes to the ERP to ensure that the systems are VAT ready on the go-live date.
Impact of VAT on Individuals
It is not uncommon these days to overhear conversations about how preponing any major purchase before the next year would be a wise decision because the purchase price might go up by a minimum five percent. While this concern is valid, even if any product is invoiced and paid for in 2018 but the delivery is taken in 2019, the purchase would still be subject to VAT. Certain issues like these make it relevant for the consumer to understand the impact of VAT on his or her everyday life.
VAT is designed in such a way that in effect, the end customer ultimately bears the brunt of the tax incurred throughout the supply chain. While paying VAT on every purchase may result into an added financial burden and an increase in the cost of living, certain basic necessities and utilities such as basic food items, drinking water, preventive and basic health care, medicines, education and so on have been zero rated.
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. For those who love to purchase jewellery, VAT brings in bittersweet news. While the purchase of gold and silver jewellery and the charges paid for making of the jewellery would be subject to VAT, pearls and gemstones would be zero rated subject to certification by the competent authority determining its nature.
It is also interesting to note that while the interest and financing cost payable with the periodic EMIs 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. For individual entrepreneurs with an annual turnover more than BD37,500, the requirement to obtain VAT registration would apply.
However, in case all the supplies being made by such individual are zero rated, application may be made to the National Bureau of Gulf Taxation, which is the nodal authority for VAT collection and administration in Bahrain, and the authority may exempt such individual from the requirement to obtain registration. Once registered, the individual would be required to charge tax on supplies made by him or her and file periodic return along with the tax payment. The benefit of being a registered supplier is that the supplier would be able to recover the VAT paid by him or her on his procurements and the same can be set off against the VAT liability on the supplies made by such individual.
For travel enthusiasts and tourists, there are many reasons to be cheerful. International travel, which includes any passage originating or terminating in Bahrain would be zero rated. Further, import of personal items and gifts carried as personal luggage will be exempted from VAT, which means that for those who enjoy taking shopping trips outside Bahrain, they can continue to bring in gifts and electronics for their loved ones back home without any additional VAT cost
Additionally, tourists have the benefit of claiming refunds of the VAT paid on goods purchased in Bahrain at the time of leaving the kingdom.
The introduction of VAT is bringing us one step closer towards the growth and development of the kingdom. With this sophisticated tax approach, the common man will be an integral part of the nation building initiative to help the government keep up with the changing economic landscape.
Register now to avoid penalties
Companies are being urged to properly prepare for the VAT regime as non-compliance could lead to severe penalties, business disruption and potential reputational risk.
Sage Middle East, a market leader for integrated accounting, payroll and payment systems, insists that businesses that have been operating in a largely non-tax environment start to organise themselves as soon as possible, analyse the impact of the new tax in detail, asses the internal systems and educate employees on the changes.
“The introduction of VAT brings an additional layer of challenges for multinational companies, as ERP solutions will need to factor in compliance,” said Mansoor Sarwar, Sage Middle East’s regional director - Technical Services & Pre-Sales,
“However, VAT-compliant accounting software and ERPs enable an easy transition and helps businesses manage their VAT returns, invoicing, reporting, adjustments, payments and refunds.”
The regulations specify the duration of the tax period should not be less than one month. 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,” added Mansoor. “Understanding the tax periods is very important, especially for small and medium businesses, due to the need for efficient cash flow management.”
If companies 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
Mansoor, pictured above, said: “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.”
Mansoor shared his tips at the Tax Transformation Workshop held at the Gulf Convention Centre. The GEC Media Group event in association with AI Society, Business Transformation and Global CIO Forum, was powered by Sage. Tanmay Saxena, head of department of Tax Services of Affiniax Partners was also present to discuss VAT’s impact.
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