Exempt Supplies Under VAT in Bahrain: List, Rules & Examples

What are exempt supplies under VAT in Bahrain?

Exempt supplies are supplies of goods or services which are exempted from VAT i.e. no VAT is charged on supply of such goods. On the other hand, Input Vat deduction will not be allowed to the business supplying exempt supplies.

Let us understand this with an example.

Abdul LLP has paid VAT at 5% on the purchase of raw materials and finished goods produced using raw materials are exempted from the VAT. In this case, Abdul LLP will not be allowed to recover 5% Input VAT paid on purchase and it should be treated as a cost of the product.

The following are the 2 things to remember if you are making exempt supplies

You may read our article ‘Important terms under VAT in Bahrain’ to know about input VAT and output VAT.

List of VAT-exempt goods and services in Bahrain

The supply of goods or services which are notified in Bahrain VAT Law and the VAT Regulations are exempted from VAT. The following is the list of goods or services exempted from the VAT.

Exemption of Financial Services Under Bahrain VAT

Supply of financial services specified in the Vat regulations will be exempt from Vat. These services will be exempted only if they are not conducted in return for an explicit fee, discount, commission, and rebate or any similar return. Otherwise, it will be taxable at 5 % VAT.

The type of financial services which will be exempted in Bahrain Vat along with the conditions will be known only when the Vat Regulations is released.

VAT Exemption on Bare Land and Buildings

The supply of bare land and building by way of sale or lease will be exempt from Vat. Again, on the availability of Vat regulations, it will be clear that what type of buildings which will be exempt from the VAT. We expect all residential buildings will be exempt from the VAT.

Import Exemptions Under Bahrain VAT

The following imports are exempted from the VAT. Meaning, the import of goods or services which are specified below will be VAT-free imports.

• Import of Goods - If the supply of such goods in the country of final destination is exempt from tax or subject to 0% VAT rate, these goods will be registered in the Customs declaration with a VAT at 0%.
• Import of Goods that are exempted from customs duties in accordance with the terms and conditions specified in the Unified Customs Law such as :
  • Diplomatic exemptions
  • Military exemptions
  • Import of Personal effects and used household items brought in by citizens residing overseas or foreigners entering the Kingdom for the first time to reside.
  • Import of returned goods
• Personal items and gifts in travellers personal luggage
• Special needs equipment as specified in the Vat Regulation.

The Bahrain VAT law only provides the outline of supplies which are exempted. Only when VAT Regulation is released, more clarity will be available on specific instances of supplies which are exempted along with the related terms and conditions.

Examples of exempt supplies under VAT in Bahrain

The following examples illustrate how VAT exemptions may apply in practice under Bahrain VAT law:

Businesses should carefully review the nature of each transaction and the applicable legal provisions before treating a supply as exempt from VAT.

Difference between exempt supplies and zero-rated supplies

Exempt supplies and zero-rated supplies are often confused because, in both cases, no VAT is charged to the customer. However, the treatment of input VAT differs significantly.

For example, certain financial services may qualify as exempt supplies, while supplies subject to a 0% VAT rate are treated as zero-rated. Although customers do not pay VAT in either case, businesses making zero-rated supplies can generally recover the VAT paid on related purchases and expenses. Businesses making exempt supplies cannot recover such input VAT.

Understanding the distinction between exempt and zero-rated supplies is important for accurate VAT compliance, proper VAT return filing, and determining the correct amount of recoverable input VAT.

Input VAT treatment for exempt supplies

As mentioned above, businesses making exempt supplies are not permitted to recover the input VAT incurred on purchases and expenses that are directly related to those exempt supplies. As a result, the VAT paid on goods or services used for making exempt supplies becomes a cost to the business.

For example, if a financial institution incurs VAT on professional services, office rent, or other business expenses used in providing exempt financial services, such VAT cannot generally be claimed as input VAT.

Where a business makes both taxable and exempt supplies, it may be required to apply an apportionment method to determine the amount of input VAT that can be recovered. Only the portion attributable to taxable supplies is eligible for recovery, subject to the provisions of Bahrain VAT law and regulations.

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