Reverse Charge Mechanism Under Bahrain VAT Law

Reverse Charge Mechanism under Bahrain VAT Law

Reverse Charge Mechanism under Bahrain VAT Law is the topic covered in this video. The applicability, accountability, and impact of Reverse Charge Mechanism under Bahrain VAT Law are well explained here. We will also see if it is a cost to your business.

In a normal scenario, if we are buying goods from a VAT Registered supplier, the supplier will be charging VAT on such products. But here, in Reverse Charge Mechanism under Bahrain VAT Law when we are importing goods from overseas to Bahrain, the overseas supplier will not be charging VAT on such goods. It will be taxed under the Reverse Charge Mechanism.

What is the Reverse Charge Mechanism Under Bahrain VAT Law?

In scenarios where we are receiving any goods from overseas, VAT will be charged on our goods by ourselves. This is called the Reverse Charge Mechanism under Bahrain VAT law, where we are charging VAT on ourselves. Under Reverse Charge Mechanism since we are charging VAT all by ourselves, we should also be responsible to make the payment to the Tax Authority in Bahrain which is National Bureau for Revenue.

In a normal scenario, the supplier will be paying VAT to the Tax Authority but here as a buyer, businesses should charge VAT themselves and also make the payment by themselves to the respective authority. The VAT liability will be accounted for under the buyer. If such registered customer is eligible to claim input for such import of goods, it can be done through VAT Returns.

How does Reverse Charge Mechanism under Bahrain VAT work?

Let us learn Reverse Charge Mechanism under Bahrain VAT Law with an example:
We are importing goods worth 1,000,000/- BHD (One Million). Assume customs duty of 5% is levied on such goods. Hence, BHD 50,000/- will be the customs duty to be paid to the authority. On 1,050,000/- BHD (One Million Fifty Thousand) 5 % VAT in Bahrain will be applicable i.e., 52,500/- BHD.

When we are importing goods VAT amount will be paid to the authority at the customs point. One thing which you have to remember is that, since you are using these goods for your business, you are eligible to claim input credit (subject to other conditions).

Hence, when you are filing for the VAT Return, you can claim this input credit along with the submission of your VAT Return. Hence, it is not a cost to your business. For the time being, you will be required to arrange an amount of cash outflow for paying VAT on import. When you are filing the VAT Return, you can claim the input credit.

On a positive note in the UAE, when we import goods to the UAE we do not pay 5% VAT at the time of import, we show it as payable to the Federal Tax Authority and when we file the VAT Return the payment is made. But can be claimed as input. It means that we show it as payable and immediately in the same VAT Return we claim input credit. In effect, if you are using those goods for your business we are not physically paying to the authority. In the same way, let us expect the same kind of change in Bahrain as well.

If the procedure is changed similar to that of the UAE, we will not pay to the authority, National Bureau for Revenue while importing goods to Bahrain. We will show it as a liability when we are filing the VAT Return and we will claim input credit as well. Because of that cash outflow will not be there for businesses.

How can you account for the Import of Services in Bahrain?

We were discussing the import of goods so far, but what about the import of services? In case any registered person is receiving any service from outside Bahrain it will be considered as an import of services. In the case of import of goods, the goods reached Bahrain through Bahrain customs records. But in the case of import of services, there is no connection with the customs authority. In general, the supplier of services located in the overseas might not have registered under VAT and hence will not be charging VAT. Hence, VAT has to be accounted for by the Reverse Charge Mechanism under Bahrain VAT. You should show this as a liability to the authority. As per the provisions of the VAT law if you are eligible to claim input credit you can claim input credit through your VAT Return. In short, the Reverse Charge Mechanism is a VAT that you are charging to yourself and paying to the authority by yourself at the same time. If you are eligible to claim 100% of the input credit accounted, it is not a cost to your business.

How to account for Reverse Charge Mechanism under Bahrain VAT for supplies made by non-resident suppliers?

Reverse charge mechanism under Bahrain VAT law is applicable in the below two scenarios:

1. Supplies of services subject to VAT in Bahrain when purchased by a taxable person in Bahrain from a supplier who is not resident in Bahrain
2.  Supplies of goods subject to VAT in Bahrain when purchased by a taxable person in Bahrain from a supplier who is not resident in Bahrain

Reverse charge mechanism under Bahrain VAT law allows a non-resident supplier to supply goods or services to a resident in Bahrain without being registered for VAT in Bahrain. Wherever the customers in Bahrain are registered under Bahrain VAT, they will account for VAT under Reverse Charge Mechanism. But in a case where a non-resident supplier is supplying goods to the customers who are not taxable persons in Bahrain, the customer has to pay VAT at the time of import in most of the cases. At the same time, if unregistered persons are receiving services from overseas, it will not be a taxable supply i.e., Reverse Charge Mechanism is not applicable.

Please Go through the video version of this blog for the better Understanding of reverse charge mechanism under Bahrain VAT Law

Emirates Chartered Accountants Group Bahrain offers an exclusive range of VAT Services in the Kingdom of Bahrain & UAE. The Tax Department has practical experience of implementing VAT in Bahrain & VAT in UAE and are professionally well versed with the Bahrain VAT laws and its compliances.

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