Bahrain is the third GCC Member state to implement VAT after UAE and Saudi Arabia. You must have read our previous article’ Important terms under VAT in Bahrain’, which talks about the common terms frequently used in dealing with VAT. In this article, let us understand what is VAT and how does VAT system work?
What is VAT?
Value Added Tax known as VAT is an indirect tax charged on the supply of goods and services as well on imports. In general, it is consumption tax levied on value addition in each stage of the supply chain. This is achieved through the concept of input VAT deduction which allows the business to set off the VAT paid on purchases (Input VAT) with the Vat collected on the sales (Output VAT).
To know What is input VAT and Output VAT, please read our article ‘Important terms under VAT in Bahrain’
How does the VAT System work?
The businesses registered under the VAT act as an appointed agent of the government to collect and remit VAT and the entire burden of paying 5% VAT is on the final consumer. To make it clearer, we need to understand the mechanism of the VAT system.
Let us understand how the VAT System works with the example.