It has been more than six months since the Bahrain Government has rolled out the value-added tax (VAT) system making the Kingdom GCC’s third member state, after the UAE and Saudi Arabia, to implement the taxation system. Following its deployment during the first half of the year, opportunities and challenges have expectedly emerged. Admittedly, ambiguity is still prevalent within the business community up until today. This remains a challenge given that many companies have still not completely grasped the full impact of the relatively new system on their operations.
In fact, many wrongly presume that VAT leads to additional costs to their business. This impression is evident in matters concerning suppliers or service providers. While in some cases it is true, but in the case of exempted supplies, for example, the payment made to the suppliers or service providers in relation to exempted supplies is typically not recovered by the business, thus, the VAT paid is considered an additional cost. Additionally, if the contract between the company and its supplier is entered prior to 2019, when Bahrain officially introduced VAT, and the agreement is silent on VAT applicability, the supply value is considered VAT inclusive as per the law. Hence, the supplier would incur VAT as a cost – resulting in decreased profit margin.
Another is in relation to the input VAT incurred prior to the registration. The amount can be claimed once the company registers under VAT, if its goods or services are used for making taxable supplies. If these goods are sold prior to VAT registration, however, VAT incurred on such products cannot be claimed.
Other instances that result in additional business cost include incorrect compliance, which leads to the organisation paying hefty fines as mandated by the law; VAT paid to any expenses, which is nonrecoverable in nature; and new personnel and software costs incurred for VAT implementation and compliances.
This new cost is the reason some unregistered business entities prefer to tap the services of unregistered suppliers, while some registered companies are hesitant to deal with unregistered organisations. The behaviour is usually the result of mere misinterpretation of the law. It is understandably that, as the country implements the tax system for the first time, some of the clauses of the law could be interpreted wrongly by some of the entities.
This is not to say that these concerns and instances are baseless. In fact, they are all valid but fully manageable if we look into the benefits of VAT implementation as a whole and the law’s positive impact on the entire business sector of the country.
VAT- A welcome change
A welcome change brought about by Bahrain leaving the tax-free set-up to operate under the VAT regime is a necessary reform implemented by many business entities to align their processes and procedures with the latest policy.
One of these notable transformations concerns suppliers, who are now keeping proper control of invoices and credit notes following the new law’s introduction. There is also now more clarity on the value of supplies between the suppliers and customers well before the supply happens. The suppliers have started giving more attention on the value declaration at customs point as well, both on import and export of goods, in addition to being more meticulous in their contracts.
Moreover, they have begun giving extra attention to retain additional supporting documents on supplies as well as taking better control measures concerning collection from their customers for compliance purposes. It is also worth noting that more importance is now given to proper maintenance of books of accounts.
VAT awareness campaigns
Minor challenges facing companies and other business institutions are still on the horizon. This is only to be expected as the sector continues to adjust to the new taxation system. However, these issues and ambiguities over the new law are seen to be ironed out and effectively addressed over a short period of time as both the government and private sectors continue to join forces to raise VAT awareness in Bahrain.
The information drive is crucial to the success of VAT deployment and business empowerment. For one, it is vital for businesses to know that their branches are not separate legal entities but are considered part of the main company. Hence, these business units cannot be registered separately under VAT.
In certain cases, however, branches are managed and operated by different persons who are not connected with each other. As such, the responsible legal person should ensure that all branches under it comply with VAT regulations accordingly and make correct and proper declarations to tax authorities.
Another is that entities importing goods into Bahrain should be aware that they must pay VAT at the time of entry of goods and claim the amount back along with the filing of their VAT returns. To be prepared, entities should know early on that they are going to face cash outflow at the time of import. In certain cases, the value declared under customs departments may vary from the actual value of import. Proper corrective measures should, thus, be taken.
Meanwhile, we still have to wait and see how serious the micro level entities are in terms of their proper VAT compliance.
It is expected that all eligible entities should come under VAT system during the remaining months of 2019. After the deployment of VAT in January 2019, tax authorities have been deploying the new system in the local business sector in three stages and the third stage of registration should be done before the end of the year. The deadline for applying for VAT is on the 20th of December 2019.
By then, we expect that every entity will be aware of VAT and, as a result, will start maintaining proper books of accounts and proper documentary evidence for relevant transactions, among others, moving forward. From 1st of January 2020, we are confident that Bahrain is going to be the third country in the GCC to have successfully benefited from VAT implementation.
Chartered Accountant Manu Nair, CEO, Emirates Chartered Accountant Group said this during Tally Solutions Bahrain VAT Summit