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Effect of VAT on price in Bahrain
Value Added Tax (VAT) was introduced in Bahrain on 1st January, 2019. The standard rate of 5% will be applicable on goods and services. However, there are few items on which tax will be subject to Zero rated and exempt.
With VAT in Bahrain introduction, price will increase with the additional 5%. However, the thing to keep in mind is that, if you are in a business (and registered under VAT) other than a retailer, you can only add additional 5% to the price agreed only if the contract already made allows you. Otherwise, if the contact does not allow you, then you cannot increase the price agreed but you still be liable to pay VAT. This means that the price agreed to will be deemed as inclusive of VAT.
Let us understand this with the help of an example
Company XYZ, a resident and registered under VAT in Bahrain, entered into a contract to sell and deliver furniture tools to Company ABC. The agreed price for this sale is BHD 5,000 without any data and the contract, doesn’t specify that the value is “exclusive of VAT”, this is deemed to be “inclusive of VAT” at the rate of 5%. In order for Company XYZ to spot the output VAT applicable to its sale, the subsequent formula is often applied:
Output VAT (at 5%): BHD 5,000 ÷ (5/105) = BHD 238.095
Therefore, company XYZ will be liable to pay BHD 238.095 by charging BHD 5000 from company ABC.
The increase in price paid due to VAT, will be ultimately be recovered by payer of such tax in the subsequent stage. The only challenge in this is that the person of the subsequent period will agree to pay the higher price that he can recover later. This leads to increase in demand of working capital. It is only the end consumer (unregistered) that will ultimately bear the VAT.
A business that is not VAT registered may increase its prices to reflect the cost of VAT paid by it on its purchases that it cannot recover from the NBR. This is usually the case when a supplier wants to protect its margin after the implementation of VAT.