Taxation (VAT) Explained

What is VAT?

Value-Added Tax is a consumption based tax on goods and services applied at every stage of the supply chain, where value is added from the production to the point of sale as illustrated in the image below.

Basics of VAT

Key Concepts

●     Input VAT: It is the tax paid by the business on its purchases

●     Output VAT: It is the VAT charged by the business on the sale of its products and services

●     VAT Return: It is a document detailing the details of a business’s transactions subject to VAT sales and purchases. It illustrates the VAT payer’s Net VAT position and summarises the value of the supplies and purchases a VAT payer has made during the VAT period.

●     Taxable Event: Any event, action, or transaction resulting in a tax consequence for the executor.

 

How does VAT work?

Forward Charge Mechanism and Reverse Charge Mechanism are two ways through which a government collects tax on goods and services.

●     Forward Charge Mechanism

○     The supplier pays the tax to the government

○     Example: Company ABC sold customer D a product for 1100 BHD including VAT. Company ABC is responsible for paying 100 BHD (10%) to the government.

●     Reverse Charge Mechanism

○     The recipient or buyer is responsible for determining the tax applicable on the goods or services and for paying the tax to the government.

●     VAT Calculation

○     VAT Amount = Initial Selling Price * VAT Percentage

○     Final Selling Price = Initial Selling Price + VAT Amount

VAT Returns

A VAT return is a document that enterprises are required to submit to the respective authority in their country (e.g. NBR in Bahrain) to report the amount of VAT they charged on the sale of their products and services (output tax) and the amount they have paid on the purchases they made (input tax). The VAT Return outlines the amount of VAT a business has collected and paid during a specific period of time (usually a quarter). It must be completed accurately and submitted to the respective authority by a specific date or within a specific time frame in order for the enterprise to remain compliant with the law (National Bureau for Revenue, n.d.).

Index

●     NBR

○     The National Bureau for Revenue (NBR) is the governmental body responsible for the collection, regulation and implementation of VAT in the Kingdom of Bahrain.

●     Net VAT

○     The price of a product or service before VAT is added

References

●     National Bureau for Revenue (n.d.). What is VAT Return? [online] National Bureau for Revenue. Available at: https://www.nbr.gov.bh/VAT/vat_return_filing.