- April 23, 2020
- Posted by: Emirates CA
- Category: Tax
Profit Margin Scheme in Bahrain
As per the Bahrain VAT Law, the general rule of the calculation of the VAT amount is that the VAT amount would be the value of supply multiplied by the rate of VAT as applicable. The value of supply would definitely include the cost of the supply and the profit.
But this general rule is defied in some cases and the taxable supplier may calculate the Output VAT on the supply by using the margin on the supply rather than the total value of the supply. Through this blog let’s learn when does the National Bureau For Revenue (NBR) approves to apply the Profit Margin Scheme in Bahrain or the calculation of VAT on the profit of the supply.
What Is Profit Margin Scheme In Bahrain?
Profit Margin Scheme in Bahrain allows the VAT payer to charge VAT only on the profit margin rather than the value of the whole supply. That is the taxable suppliers can consider the margin to compute the Output VAT.
The Profit Margin Scheme in Bahrain is intended to avoid VAT being applied to that part of the value of the supply that was already subject to VAT. This happens in the case where the VAT amount already paid on the goods was irrecoverable. In the Tax Invoice, once the Profit Margin Scheme in Bahrain is used, a reference should be kept saying that ‘VAT has been charged based on the Profit Margin Scheme’.
It is very important to note that the Profit Margin Scheme in Bahrain is not mandatory. Also, the supplier must obtain prior approval from the NBR to use the Profit Margin Scheme in Bahrain.
What are the conditions to be met for the use of the Profit Margin Scheme in Bahrain?
All the following condition should be met by the company who wants to apply the Profit Margin Scheme in Bahrain:
- The goods sold under the profit margin scheme should be a Used good (a second hand good)
- The goods sold should be suitable for further use in its current condition or after repairs (but these repairs must not be a major one and should not alter the use of the goods).
- The goods sold must be a work of art, artifact, or other items of scientific, historical, or archaeological interest.
- The supplier should have bought the goods in Bahrain from any one of the following:
- Unregistered dealer in Bahrain.
- A taxable person who sold the goods under the profit margin scheme.
- From a taxable person who could not recover the input VAT paid for the goods.
- The supplier should not have recovered the Input VAT paid on the goods.
- The supplier should issue and maintain the correct documents.
Apart from the above for using the Profit Margin Scheme in Bahrain, the VAT payer should also obtain approval from the NBR.
What are the documentation required to be retained for the application of the Profit Margin Scheme in Bahrain?
As said earlier the companies are required to maintain certain documents to apply the Profit Margin Scheme in Bahrain.
The following are the documents to be retained for applying the Profit Margin Scheme in Bahrain:
- The company that is supplying goods under the profit margin scheme should issue a Tax invoice to the customer. The tax invoice must clearly indicate that VAT was charged using the profit margin scheme and must not show/disclose any tax amount on the Tax invoice.
- In some cases the company might have purchased the goods he is selling under the profit margin scheme, from another company who himself sold the goods under the profit margin scheme, In such situations, the company issuing the goods must retain the tax invoice received from his supplier to evidence the purchase being made under the profit margin scheme.
- Where the company has procured the goods from an unregistered dealer, then he must self-issue a tax invoice to evidence the same. This self-issued tax invoice should be signed by the supplier (Whom he bought the goods) of the goods or his authorized person.
How to calculate the Output VAT under the Profit Margin Scheme In Bahrain?
VAT is payable on the margin realized by the supplier for supplies of goods made under the Profit Margin Scheme in Bahrain. The margin is the difference between the sale price and their price of purchase. This margin is considered VAT inclusive.
For the computation of Output VAT under the profit margin scheme, the “profit margin” would be the difference in selling price and the purchase price of the goods.
This profit Margin computed would be considered as inclusive of VAT and therefor, the taxable value of supply can be calculated as:
- Profit Margin ÷05
And the VAT amount would be: Taxable value × Rate of VAT
The VAT amount can also be calculated using the following formula:
- Profit Margin ÷ 21
The selling price used should be the consideration received for the goods and the purchase price would be the total consideration paid to obtain the goods. That is both should include all the incidental expenses like commission, packaging, transportation, insurance, etc. charged by the supplier of goods.
In case the purchase price is higher than the selling price then no VAT amount would be applicable to the goods.
Can Input Tax be recovered while using the Profit Margin Scheme in Bahrain?
As said earlier the supplier computing the Output VAT on the goods based on the Profit Margin Scheme in Bahrain is not supposed to recover any input VAT incurred earlier during the purchase of the relevant goods.
Also, the supplier should not claim any input VAT recovered on the incidental expenses incurred during the purchase if these expenses are included in the sale value of the goods.
What is to be done in case NBR challenges the use of the Profit Margin Scheme in Bahrain after its application?
In case, the NBR challenges the use of the Profit Margin Scheme in Bahrain, then the supplier is obliged to compute the output VAT on the total value of the supply of the relevant goods and should not use the Profit Margin Scheme. In order to do this, the supplier is required to adjust the Output VAT amount that he might have calculated earlier. He can do so by using a valid tax invoice/credit note to support the adjustment to the Output VAT.
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