Essential Insights into VAT Supply: Key Definitions, Components, and Scenarios

What is Supply Under VAT?

Supply can be defined as a transferral of ownership of goods, or acquiring the right to use the goods as an owner. All supplies that are not considered to be a supply of goods are considered a supply of services.

Types of Supply

There are four different types of supply under VAT:

Supply of Goods
Selling of goods from one party to another, or the transferral of rights of ownership, is known as supply of goods.

Supply of Services
Supply that does not involve the selling of goods is known as supply of services.

Supplies Made or Received on Behalf of a Taxable Person
Supply in which a person manufactures or acquires goods on behalf of another taxable person falls into this category. In this case, the person receiving or making the supplies is considered to be the buyer and seller of the goods under the VAT Law of Bahrain.

Deemed Supplies
Goods and services that are made or given away for non-profit purposes are known as deemed supplies. A taxable person is said to be making or giving away deemed supplies if:

• The goods form a part of their business assets and are used for purposes other than economic activity.
• The goods’ intended usage is changed to making non-taxable supplies.
• The goods are retained on the day of deregistration in spite of ceasing all economic activity.
• Services are provided without a motive for economic gain.
• Goods are disposed of without a motive for economic gain, unless they are handed out as samples or gifts with a motive for economic gain according to the value limits set by the Regulations.

Components of Supply

There are three components of supply that are used to calculate the total amount of tax applicable on a transaction:

Place of Supply
The place of supply tells you whether the supply takes place inside the Kingdom of Bahrain or outside of it, for VAT purposes.

Place of Supply for Goods
The place of supply of goods is the Kingdom of Bahrain if:

• The goods in question have been sold to consumers within the Kingdom without transportation or dispatch.

• The goods originate from the Kingdom before getting dispatched or transported to the consumer by the supplier.

• The goods are assembled or installed in the Kingdom.

• The goods are internal and supplied by a registered supplier to a taxable consumer in the Kingdom.

• Internal goods are supplied (without assembly or installation) to a consumer in another VAT-implemented state.

• In this situation, the supplier must be a registered tax person in the Kingdom and the recipient must be non-taxable from the VAT-implemented state.

Place of Supply for Services
If the registered supplier resides in the Kingdom, the place of supply will be the Kingdom. If a registered tax payer from another VAT-implementing state utilizes the services of a registered supplier from the Kingdom, then the place of supply for such services will be the place where the taxable customer resides.

Place of Supply for Other Services
The place of supply for services will be determined based on the following scenarios:

• If the registered supplier does not live in the Kingdom of Bahrain, then the place of supply for the service will be the location where the taxable customer resides.

• If a registered supplier provides transportation services for a customer, then the place of supply will be the location where the transportation service begins.

For the following services, the place of supply will be the location where the service takes place:

• Restaurant services

• Hotel services

• Musical concerts

• Sporting events

• Educational services

• Recreational activities

• Artistic events

• Real estate services

• Services involving the transportation of goods from a taxable supplier who resides in the Kingdom to a non-taxable customer residing in a VAT implementing state.

Time of Supply
This component of supply determines when the tax due is payable and which tax period the transaction falls under.

VAT is due on the earliest of the following:

• The date on which the goods or services were supplied.
• The date when the tax invoice was issued.
• The date on which the partial or full payment was received.

The time of supply of goods and services will be determined based on the following conditions:

For general services, the time of supply will be determined as follows:

• The date on which the services are completed (or)
• The date the customer explicitly approves of the service (or)
• The date the customer issues a certificate of completion of the service, whichever is earlier

Primary and Secondary Services

There are two kinds of services of supplies that you should be familiar with, primary and secondary.

A primary service is the service that you actually want and are paying for. Any other service provided besides the primary service is a secondary service. You should note that both these services will have a separate time of supply which means that the time of supply of the primary service does not affect the time of supply of the secondary service.

For example, say you provide interior services to a customer and after the service is completed, the customer requests you for an alteration in the service. The first service that was completed will be the primary service and the alteration on the service will be the secondary service. The altered service will have a separate time of supply since it is considered to be a new service altogether.

Time of Supply of Primary and Secondary Services
After the implementation of the primary service, any other service that is provided will be considered to be a secondary service.

The time of supply for these additional services will not affect the primary services’ time of supply, i.e., the secondary service will have a separate time of supply.

The time of supply for goods and services that contain periodic payments or consecutive invoices will be the earliest of the following:

• The date on which the tax invoice is issued for the goods or services under consideration.

• The due date of the payment to be made as specified on the invoice.

• The date of receiving the payment.

• For payments made through vending machines, the time of supply will be the date on which the payment is collected from the vending machine by its owner.

• For deemed supplies, the time of supply will be the date on which the goods are given away. This situation applies only if the ownership of the supplies change or when a business is undergoing deregistration.

• For vouchers, the time of supply will be the date on which the voucher is issued or the supply is made, whichever is earlier.

Value of Supply
The value of supply is the total amount of money that the seller collects from the consumer of the goods or services.

Determining the Value of Supply
The value of supply is calculated based on the total amount of payment due for the goods or services, exclusive of tax. This amount includes all expenses made, along with excise tax, but it does not include VAT.

The following sample situations illustrate how the value of supply is calculated:

• If the supply is exchanged for monetary benefits, then the value of supply will be the amount that is paid by the recipient of the supply.

• If the supply is not exchanged for monetary benefits, then the value of supply will include any amount of money paid and its fair market value on that day.

• In reverse-charge transactions, the value of supply will be the amount of money paid to purchase the supply. If the amount paid for the purchase cannot be determined, then the fair market value for the supply will be considered to be the price of purchase.

• If a particular part of the supply does not apply to the supply of goods and services, then the value of supply will be determined only for the part of supply that is eligible for the supply. For example, if you purchase a product and receive an additional product along with it at no extra charge, the value of supply will be calculated only for the product that you pay for and not for the add-on.

• For deemed supplies, the value of supply will be based on the purchase price of the supply or the actual cost of goods to manufacture the supply. If these attributes cannot be determined, then the fair market price of the supply will be the value of supply.

• The value of supply of vouchers is determined to be the difference between the actual cost of the supply and the amount that is specified on the voucher.

• If a supply is discounted, its cost slashed, or it is subsidiary, the determination of the value of supply is applicable as long as it is granted by the Kingdom.

Note:
The tax payer is allowed to calculate the value of supply on certain goods and services based on the profit margin mechanism, as long as it is approved by the Authority.

Amendments to the Value of Supply
Amendments can be made to the value of supply if:

• The supply is not considered or rejected, either completely or partly.
• The supplier provides a discount to the value of supply.
• The supply is not acquired either partly or completely because of bad debt situations.
• The supply is returned by the customer with the supplier’s agreement.
• There is a change in the amount of tax that is applicable on the supply.

Deemed Supplies

Deemed supply describes goods and services for which there is no remuneration received. These goods may be bought for business purposes, but are given away to the end consumer at no charge.

Goods and services are considered to be a deemed supply in any of the following cases:

• If a business owner acquires goods for their business and these goods are used for any purpose other than economic activity.
• If the goods’ intended usage is changed to making supplies that are non-taxable.
• If the goods are retained on the day the business is deregistered, after stopping all economic activity.
• If the goods are disposed of without being charged for, unless they are handed out as samples or gifts. The latter constitutes economic activity, hence the value of the samples or gifts must fall within the limits set by the VAT regulations.
• If services are provided and are not charged for, they are considered to be deemed.

Exceptions to Deemed Supplies

• Supplies are not deemed if the input tax on the supply is not deducted.
• If the deemed supply itself is exempt from tax, the supply is not considered to be deemed.
• The samples or gifts will not be treated as deemed supplies if their value does not exceed BHD 50 per person per year.
• The maximum amount of gifts and samples that a business owner can give away without receiving payment is BHD 1000 throughout the year.
• Samples that are handed out without charge must be a sample of the product that is promoted. These samples must allow the consumer to test the qualities and features of the product without purchasing it, unless selling the product is the only way to promote it.

Composite Supplies

Goods and services are considered to be composite supplies if the two or more components that make up the sale of the product can be sold only as a set and not individually.

Principal Supply: The principal supply is the main component of the composite supply. This is the part of the product that the customer is mainly interested in, and the remaining part of the composite supply just adds an extra value to the product. Every composite supply has a principal supply.

For example, consider a mobile phone. Out of the box, you’d get cables, wall adapters, and sometimes, even a protective case. This is considered to be a composite supply, because these peripherals and accessories cannot be used without purchasing the mobile phone itself. Here, the mobile phone is the principal supply.

Mixed Supplies
Goods and services are considered to be mixed supplies if there are two or more products that are sold together, but can also be sold individually.

Supplies Made Through Agents
Suppliers who make or receive goods and services on behalf of a client, under their own name, will be considered to have made the goods or services themselves.

In the case where a supplier supplies goods and services under the name of and on behalf of a client, the supply will be considered to be made by the client, for tax purposes.

Disclosed Agents
Disclosed agents are suppliers who act on behalf of a client. Customers know that they are dealing with an authorized agent who is acting on behalf of the client.

Disclosed agents need the following documents to prove that they act on behalf of the client:

• A power of attorney from the client in which the client authorizes the disclosed agent to act on their behalf.
• A contract, invoice, or a document that shows that the supply was made on behalf of the client. This document must contain the subject of the transaction, the name and address of the client, and details of the third party.

Transactions Between a Head Office and its Branches
Transactions that are carried out between a head office and its branches, or between two or more individual branches, will not be taxable since these transactions are considered to be within a single legal entity.

Disbursements and Reimbursements

Disbursements
A disbursement is a situation in which a person makes a payment on behalf of another person and later recovers the money.

For example, say your employer asks you to pay a supplier an amount of money. The client sends an invoice to your employer, you pay the invoice, and your employer refunds the amount you paid back to you. Because you are merely acting as an agent between your employer and the client, neither the payment you make nor the amount you recover from your employer falls within the scope of VAT.

Reimbursements of Expenses
A reimbursement occurs when a person makes a payment on behalf of another person, but is directly invoiced for it, making them a principal in the transaction.

For example, say you attend a meeting in another country for work purposes. The hotel invoices you directly for your stay, and you pay the invoice. In this situation, you can request a reimbursement from your employer. Because you are the person who is invoiced and hence, the payment and reimbursement fall within the scope of VAT.

Market Value
The market value of goods and services will be determined according to the fair price in the market, assuming a transaction between two independent parties on the same date as the time of supply.

The following free competition conditions apply:

• The supplier and the customer must not be under any pressure.
• The supplier and the customer are at liberty to work out a price that they feel serves their best interests.
• The transaction must be completed within a feasible period.