Conditions for Input VAT Recovery in Bahrain

Under the Bahrain VAT Law, Input VAT Recovery in Bahrain is incurred by a taxable person is subject to various conditions to be met.

As per the Bahrain VAT Law, generally, Input VAT incurred for the purpose of an economic activity which is taxable (that is, either VAT at 5% or 0%) can be recovered in full or part up to the amount incurred for the purpose of such economic activity.

Through this blog, you will get an insight into the conditions for Input VAT Recovery in Bahrain and how to compute the value of recoverable Input VAT.

What are the conditions to be met for Input VAT Recovery in Bahrain?

The following conditions are to be met to recover Input VAT recovery in Bahrain incurred on expense:

    1. You must be a taxable person as per the Bahrain VAT Law.
    2. You should have incurred the Input VAT for the purpose of conducting economic activity.
    3. These expenses incurred should be used for making taxable supplies (that means the supply should not be exempt as per the Bahrain VAT Law).
    4. The recovery of such Input VAT should not be specifically disallowed by the Bahrain VAT Law.
    5. You should have all the supporting documents evidencing the Input VAT incurred (for e.g., tax invoices, import documents etc.)
    6. The Input VAT should have been claimed within the time limit set by the Bahrain VAT Law.

How to compute the Input VAT recoverable as per the Bahrain VAT Law?

As stated above, only the Input VAT incurred for expenses used for taxable supply can be recovered. Input VAT incurred for the purpose of any exempt activity or a non-economic activity cannot be recovered.

In case you incur an expense, which is used for the purpose of both economic and non-economic activity then such Input VAT incurred should be apportioned between the two. Similarly, Input VAT incurred for an expense attributable to exempt and taxable supply should be apportioned. Only that portion of the Input VAT that is attributable to a taxable supply shall be claimed by the VAT payer.

For example, ABC supermarket incurred Input VAT of BD 20/- for cleaning charges in the month of December 2019 for the cleaning and supervision of its premises. 40% of the premises is rented out (exempt supply) while 60% is used as a supermarket (where only 5% and 0% of goods are being sold). In this case, ABC supermarket can claim only 60% of the input VAT incurred on cleaning charges. Being the Input VAT attributable to a taxable supply.

What is the time limit of Input VAT Recovery incurred?

Input VAT is incurred when VAT on supply is triggered, that is on the tax due date. And the Input VAT thus incurred can be recovered through the filing of VAT return subject to the conditions of recovery rules.

Suppose you do not possess a valid tax invoice evidencing the input VAT incurred at the time of filing the respective return. In such a case, you may claim the Input Tax at a later VAT period after collecting the proper Tax Invoice. But such later VAT period should be within five years from the end of the calendar year on which the input tax was recoverable.

For example., In the above case of ABC supermarket, suppose ABC supermarket could not claim the Input VAT incurred on cleaning expense due to the absence of a valid tax invoice while filing the return for the VAT period ended 31st December 2019.

It received a valid tax invoice in Feb 2020. But by Feb 2020, only 30% of the premises were rented out and 70% of the premises were used for the supermarket. This means ABC can claim the Input VAT while filing the return of Feb 2020 provided it should claim only 60% of BD 20 (that corresponds to the recovery ratio at the time that input VAT became recoverable).

What is the Input VAT specifically disallowed by the Bahrain VAT Law?

The Input VAT incurred for the following expense is specifically disallowed by the Bahrain VAT Law and you cannot recover these Input VATs.

    1. Input VAT paid on the entertainment expense incurred for staff and non-staff members of the organization.
    2. Input VAT paid on an expense incurred for the recreational purpose that is for accessing events or functions.
    3. Input VAT paid on goods or services used for personal purposes by the employees except when such usage is required by Bahrain Labor Law or any other law.

In the case of Vehicles, mobile phones, etc. which are used for both business and non-business purposes only Input VAT to the extent of business use can be recovered.

How to recover Input VAT on residual expense as per the Bahrain VAT Law?

In some cases, a taxable person might be carrying out an economic activity that is partially taxable and which is partially exempt. Such activities are referred to as “partially exempt businesses”. In the case of such businesses, there might be many expenses that cannot be directly attributable to any specific activity. These expenses are called “residual expenses”.

The Input VAT incurred on residual expenses can be recovered using the standard apportionment rate or Specific Apportionment rate.

The Standard apportionment rate can be calculated as:   

Taxable supplies ÷ (Taxable supplies + exempt supplies)

The following supplies should be excluded while calculating the above percentage:

    1. The value of capital assets sold during the VAT period, as these are “exceptional” supplies and including these may distort the ratio.
    2. The value of those supplies which are incidental and may not relate to the core income-generating activity of the business. Again, including these may distort the ratio.
    3. Out of scope transactions made by the taxable person.
    4. The value of the supplies made by a branch located outside Bahrain.

Please note: The above apportionment ratio should be recalculated for every VAT period.

Special apportionment method:

In case the usage of the above method is impractical or is not fair or reasonable, then the VAT payer can use any special apportionment method prior to the approval from NBR. The NBR after its approval also provides an effective date of using the special apportionment method.

Special apportionment methods can be factors relevant to the business. The following are examples of special apportionment:

    1. The number of staff working on taxable activities compared to the number of staff working on exempt activities.
    2. The number of taxable and exempt supplies made instead of their actual Value.

Our Tax Experts in Emirates Chartered Accountants Group Bahrain believe in a proactive approach to tax advisory services with a cost-effective and tailor-made option that is preferred by businesses all over.

Input VAT Recovery in Bahrain

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