- April 12, 2020
- Posted by:
- Category: Tax
VAT in Bahrain Case Study
Many products are sold in the Bahrain market with a warranty that usually covers the reliability of goods for a specified period during which the goods are expected to be non-faulty.
Coming to the purview of VAT in Bahrain, it is very important to understand the VAT implications of such warranty repairs arising subsequent to the sale of goods from the point of view of the manufacturer, dealer and the customer as per the Bahrain VAT Law.
Let us now understand if the warranty repair service is subject to VAT In Bahrain in a detailed case study of ABC Electronics.
Case Study 1
ABC Electronics is a retailer that sells electronic products to its customers in Bahrain. They buy Laptop from a reputed brand name, DEF Manufacture Co. and sells to its customer. DEF Manufacture Co. provides a warranty card to the customer for the period of one year for all its Laptops supplied.
Mr. George buys one such Laptop from ABC Electronics. After one-month Mr. George finds that the laptop overheats and brings it to ABC Electronics for repair.
Let us look at the VAT implication of this transaction case by case.
- When the repair service for the Laptop is provided by ABC electronics free of cost as it is within the warranty period.
In this case, ABC Electronics has a contractual obligation to repair for any defaults during the warranty period and therefore, ABC electronics company cannot charge for the repairs. The repair service provided by ABC Electronics to Mr. George is out of the scope of Bahrain VAT law.
Therefore, no VAT should be charged on the repairs.
- When ABC Electronics reimburses the cost of repair from DEF Manufacture Co.
When the ABC Manufactures repairs the laptop by itself, it incurs a certain expense. This expense incurred will be reimbursed from DEF Manufacture Co.
The basic principle here is that, at the time of the sale of the original products (here – Laptop), National Bureau For Revenue (NBR) considers that the warranty repair facilities are not separate supplies and the amount was paid and the VAT was accounted for it. This can be applied were the cost of warranty provided is an integral part of the selling price of the goods from the manufacturer to the dealer and from the dealer to the customer (in this case, since the warranty card is issued by the DEF Manufacture Co. at the time of initial sales we can consider it as the cost of warranty has been covered in the selling price of the Laptop).
And therefore, the reimbursement made by the ABC Electronics from DEF Manufacture Co. is out of the scope of the Bahrain VAT Law. But this can be applied only if ABC electronics asks for reimbursement of the exact cost of repairs.
In case, ABC Electronics accounts a margin on the cost of repair, the margin will be subject to VAT in Bahrain at Standard rate.
For Example, if ABC Electronics incurs BHD 10/- for repairs and reimbursed BHD 20/- from DEF Manufacture Co. then the margin of BHD 10/- should be accounted for VAT in Bahrain at a standard rate.
In case the warranty repair cost is not covered in the original sale price of goods then the subsequent repairs on such goods will be treated as a separate supply for the purpose of VAT and VAT should be accounted at Standard rate. That is, in this case the cost of repair reimbursed from DEF Electronics will be subject to VAT in Bahrain at Standard rate.
- When ABC Electronics or DEF Manufacture arranges a third party for the repair of goods.
When the repair of the Laptop is done by a third party (that is, who is not a party to the initial supply of the goods) then this third party should charge VAT in Bahrain at the Standard rate on the repairs to ABC Electronics or DEF Manufacture Co. as the case may be.
Case study 2
Suppose in this example Mr. George purchases extended warranty period of 1 year at the time of buying the Laptop or at the end of the expiry of the initial warranty period of 1 year.
In this case, ABC Electronics will acquire extended warranty from DEF Manufacture Co. and supply it to Mr. George. Such extended warranty acquired is a separate supply for the purpose of VAT as per the Bahrain VAT Law and hence let us look at the VAT implication of this transaction case by case:
- If DEF Manufacture Co. is located outside Bahrain: In this case ABC electronics should self-account for VAT in Bahrain under Reverse Charge Mechanism on the amount paid to DEF Manufacture Co. for the extended warranty.
- If DEF Electronics Co. is a Bahraini company: In this case, DEF Manufacture Co. should account for VAT in Bahrain at the standard rate and issue a tax invoice to ABC Electronics.
3.ABC Electronics should account for VAT in Bahrain at Standard Rate on the amount collected for extended warranty and issue a tax invoice to Mr. George.
- The VAT treatment of any repair of the Laptop during the extended warranty period will be same as the VAT treatment during the warranty period as mentioned above in Case Study 1.
Case study 3
Suppose in the same example the ABC Electronics have sold the laptop to Mr. George on 25th December 2019 with a warranty period of one year and Mr. George bring it for repair on 5th January 2020. The effective date of VAT registration of ABC Electronics is 1st January 2020.
In this case, the Laptop is sold to Mr. George before the VAT registration date by ABC Electronics but the subsequent repairs have arrived after the VAT Registration date. Even in such a case the VAT treatment of the repairs on the goods during the warranty would be the same as mentioned above in Case Study 1.
Can ABC Electronics recover the Input VAT paid on the repair of goods to Mr. George during the warranty period?
Yes, subject to the Input VAT recovery rules, ABC Electronics can recover the Input VAT incurred for the repair of the Laptop. Moreover, in case DEF Electronics Co. repairs the Laptop it will also be eligible to recover the Input VAT incurred subject to usual input tax recovery rules.
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