VAT Treatment in Bahrain

The VAT Treatment in Bahrain for Damaged or stolen goods, obsolete goods, consignment stock etc is often confusing. The Bahrain VAT Law clearly lays out the procedures to be followed by an organization in these situations.

Let us look at the VAT treatment in Bahrain for Inventory under various circumstances:

1. Damaged/Lost or Stolen Goods:

There are many instances where the goods purchased for the purpose of economic activity would be lost or stolen or damaged. The organization should have claimed Input VAT that arises on the purchase of these goods. In case these goods are lost, damaged or stolen the organization need not reverse the Input VAT claimed on these goods earlier provided they have proper documents evidencing the lost/Stolen or Damaged goods.

What constitutes evidence for these goods under the Bahrain VAT Law?

In case the value of the damaged or lost or stolen goods does not exceed BHD 1,000 in a calendar year then internal documentation will be sufficient evidence for the loss or damage. Such internal documentation should compulsorily include the following:

1. A detailed description of the goods lost, stolen or damaged (For e.g. item code, SKU etc.).
2. The purchase price of these goods and the input VAT claimed on the purchase of these goods.
3. An indication as to whether the goods were lost, stolen or damaged.
4. Evidence that the said goods have been written off in the financial statements of the VAT payer.

In case the value of the damaged or lost or stolen goods exceeds BHD 1,000 in a calendar year, evidence for the excess amount should be obtained from the third party such as police reports, insurance claims etc.

However, the Auditors report would be sufficient in case the total value of goods exceeds BHD 1,000 but total cost or market value of the individual stock does not exceed BHD 1,000.

But in case of goods which are damaged due to their nature (for e.g., fruits and vegetables) then such third-party evidence is not required when the company can prove that it has been damaged due to their nature. To avail this exception the VAT payer must maintain detailed records of the nature of the goods, how many were damaged and how the damage took place.

In case the above evidence is not available then the VAT payer must reverse the Input VAT that was claimed while procuring the goods which are damaged or stolen or lost.

1. Obsolete Stock

Obsolete Stock refers to the Inventories that are no longer being used or that can no longer be traded and is not useable or needed. This happens when something newer or better has replaced the said stock. Usually when a company disposes of such obsolete stock for no consideration then:

• He is not regarded to have made a supply of goods for the purpose of VAT and therefore is not obliged to record for VAT on the stock.
• The company need not reverse the Input VAT that was claimed while procuring the said stock.

Provided, the above is subject to the following conditions to be met by the company:

• The company must give 30 days advance notice to the NBR with all the required details before the disposal of the obsolete inventory. But in the following cases there is no requirement to give prior notice to the NBR:
  5000. Where the total value of the obsolete stock where the input has been claimed or partially claimed does not exceed BD 5000.
  5001. Where the goods are perishable food items that are no longer fit for human consumption and should be disposed of off quickly to avoid any risks to human health.
  5002. Where the goods consist of hazardous materials which are required by a Bahraini law to be immediately disposed to avoid any potential damage to human health, property etc.

However, for the above exception to apply the VAT payer must retain documents as required by the NBR and submit it on request from the NBR.

• The goods must be disposed of in accordance with Bahraini law or other applicable rules issued by the Supreme Council for Environment, Ministry of Industry, Commerce and Tourism or other competent authority.
• Stock accessible by the customer

Some supplier makes the stocks available to the customer and the customer may access these stocks as and when required without prior approval from the supplier.

For example, a car manufacturer AFG places the spare parts of the cars with a third-party mechanic whereby the mechanic uses these spare parts as and when required and at regular intervals provide a list of items used by them to AFG.

In the above case the supplier is deemed to have made the supply when the goods are made available at the customer for use and not when the customer notifies the supplier about the goods they have used. The legal title of the goods may or may not have been passed when it is made available and this is not relevant in determining the tax due date.

In case the customer returns some goods back, then the supplier may issue a credit note to reverse the VAT charged earlier.

1. Sales or return transaction

In a sale or return agreement, the goods are supplied to the customer who has an option to accept or return the goods within a given time.

In such a transaction the supplier is deemed to have made the supply when the goods are made available at the customer for use and not when the customer makes the decision to use them or to return them.

If the customer returns some goods, then the supplier may issue a credit note to reverse the VAT charged earlier.

1. Consignment stock

In the case of a consignment stock arrangement, the supplier (consignor) deposits the goods with another person (consignee) and the consignee sells the goods to the third party. In such an agreement the consignee does not take the legal title to or ownership of the consignment stock.

As per the Bahrain VAT Law, a consignment stock arrangement has two supplies for the purpose of VAT:

• Supply from the consignor to the consignee.
• Supply from the consignee to the customer.

For the purpose of VAT, when consignee sells the goods to the customer, this will be the time of supply for both supplies.

Example: A dress manufacturer sends dresses to a Boutique on a consignment basis on 3rd September. The dresses are stored by the consignee for six months and will be returned to the consignor if not sold by the end of that period.

On 5th October, the Boutique sells 50 dresses to his customers. This results in:

• A sale of 50 dresses by the dress manufacturer to the Boutique; and
• A sale of 50 dresses by the Boutique to his customers

The date of the supply of both of these transactions is on 5th October. The remaining dresses are returned to the dress manufacturer at the end of the six months. No supply for VAT purposes arises in respect of these returned dresses.

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