How does VAT work?
At each step of the supply chain, the seller calculates VAT and adds it to the initial selling price of the product to create a tax-inclusive final selling price.
Consider the following example:
VAT Return Timeline for 2019:
For businesses with annual turnover over BHD 3 million, the VAT return timeline is as follows:
| Supply Chain | Initial Selling Price | VAT Amount (5%) | Final Selling Price |
|---|---|---|---|
| Manufacturer to Wholesaler | 1,500 | 75 | 1,575 |
| Wholesaler to Retailer | 2,000 | 100 | 2,100 |
| Retailer to Customer | 2,500 | 125 | 2.625 |
- All monetary values in BHD (Bahraini Dinar)
The amount of VAT in each step is calculated using this formula.
In the first stage of the supply chain, the manufacturer of the product sells it to the wholesaler at a final selling price of BHD 1,575, after applying VAT of 5% to the initial selling price of BHD 1,500.
The wholesaler then sells it to the retailer at a final selling price of BHD 2,100, after levying VAT of 5% on their initial selling price of BHD 2,000.
In the last stage of the supply chain, the retailer sells the product to the customer at a final selling price of BHD 2,625 after adding VAT of 5% to the inital selling price of BHD 2,500.
From this illustration, we can see that VAT is applied at every stage of the supply chain. Registered business owners will receive tax credits based on the VAT they paid in the previous stage.