Bahrain Guide: What is Input Tax under VAT?

In Kingdom of Bahrain, the VAT law allows to claim VAT paid on your purchases. VAT charged on purchases can be recovered in the following conditions:

• When the VAT charged on expenses is further used for a taxable activity.
• Also, VAT charged on expenses can be recovered in part also, when used for part taxable supplies. 

Time period for recovery of Input tax in Bahrain

VAT input can be claim as soon as the tax becomes due on that transaction i.e. with the filing of that periodic return. However, if due to some reason, if a registered person is not able to claim the input in the respective tax return, it can still be claimed within a period of 5 years from the end of the calendar year where that input tax became recoverable.

Conditions for claiming Input tax in Bahrain

For being able to claim input tax paid, following conditions need to be met:

• You are a taxable person
• The expense on which VAT is paid is for purpose of your economic activity.
• The recovery of input tax on the expenses is not specifically disallowed by the VAT Law.
• These expenses are used for making taxable supplies.
• You have the supporting original tax invoices.
• You claim input tax within the time limit set by the VAT Law, i.e., five years.

VAT input in Bahrain Eligibility

Not all of Vat tax paid can be claimed by the eligible person as input. Let us look into various scenarios for the same.

1. Expenses for economic and non-economic activity
   Only VAT paid on expenses used for the purpose of an economic activity is eligible as input tax. If someone incurs expenses which relate to both economic and non-economic activities, then they are required to apportion these expenses between their economic use and their non economic use. Only the VAT on the portion allocated to economic activity will be regarded as input tax and can be claimed.
2. Differentiate between taxable and exempt supplies in Bahrain
   • One should identify the expenses which are directly and exclusively used for making either taxable supplies or exempt supplies.
     • Input tax on expenses used directly and exclusively for taxable supplies is fully recoverable.
     • Input tax on expenses used directly and exclusively for exempt supplies is not recoverable.
   • For the purposes of direct attribution “taxable supplies”include the following:
     • Taxable supplies in Bahrain at the VAT rate of 5% or 0%
     • Intra-GCC supplies
     • Out-of-territorial scope supplies which would be taxable supplies if made in Bahrain.
   • For the purpose of the direct attribution “exempt supplies”include the following:
     • Exempt supplies in Bahrain
     • Out-of-territorial scope supplies which would be exempt supplies if made in Bahrain.
3. If Input Tax is disallowed 
   One needs to identify, whether the input tax on these expenses is disallowed under the VAT Law and the Executive Regulations. Input tax is always disallowed when it relates to goods that are illegal to trade in Bahrain. The VAT Law also lists certain expenses for which input tax can never be recovered. 

List of expenses disallowed under VAT Law in Bahrain:

1. 1. Input tax paid on goods and services to be used by employees for free for personal use, except when these are required by labor law or other laws in Bahrain.
   2. Input tax paid on entertainment incurred for staff and non-staff members.
   3. Input tax paid for accessing events or functions, and for trips for recreational purposes.
   4. Input tax paid on vehicles provided to employees and on related services (maintenance, repair, insurance) to the extent of non-business use.

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