Bahrain VAT – Domestic Reverse Charge Mechanism

by Jayati Gadamsetty 26, Feb 2024

The Kingdom of Bahrain put into practice the Value Added Tax (VAT) system in January 2022.  VAT is applied to goods and services provided within the country. 

Bahrain’s VAT structure includes a system known as the Domestic Reverse Charge. This ensures that instead of the supplier, the buyer has to pay VAT on specific transactions directly to the government.

Let us get into the details of the domestic reverse charge.

What is the Domestic Reverse Charge Mechanism?

In simple words, the domestic reverse charge is a concept in which the buyer must pay VAT on domestic supplies. The vendor will not charge any VAT even though they are registered under the VAT rules in Bahrain.

Only certain vendors can apply for domestic reverse charges in Bahrain. Businesses that are involved in the export of goods and supplies and ‘Intra-GCC supplies’ can apply for domestic reverse charges at the National Bureau of Revenue (NBR).

Why was the Domestic Reverse Charge introduced in Bahrain?

The domestic reverse charge is a part of the Bahrain VAT law for two important reasons.

  1. Reducing Financial Impacts on Exporters

Plenty of businesses whose primary activity is exporting goods or services often have to pay VAT on their expenses and cannot recover the cost through their zero-rated or exempt supply. This leads to negative cash flow. The domestic charge mechanism reduces this load on exporters.

  1. Dealing with Administrative Matters

Some products that are not subject to VAT or supplies with a 0% VAT rate can add unnecessary burden to the supplier and the authorities. The domestic reverse charge simplifies the process by shifting responsibility to the buyer.

Prerequisites to Apply for the Domestic Reverse Charge Mechanism

For an exporter to apply for a domestic reverse charge mechanism, they must follow certain criteria. Read them below -

  • The total amount of Intra-GCC supplies and exports that exceed 50% of their actual value of supplies must be shown by the taxable entity.
  • The taxable entity should recover the VAT as input tax on the goods and services supplied.
  • Reasonable grounds should be provided to the bureau by the taxable person, showing that the net tax is regularly negative. Creating impact on the business’s financial position.

Cancellation of the Domestic Reverse Charge Mechanism Under Bahrain VAT Law

A company established in the Bahrain free zone or in the mainland must follow the rules set by the NBR regarding this mechanism. Read the cancellation procedure below.

  1. If the company can no longer follow the conditions mentioned above, then it will have to inform the NBR within thirty days.
  2. The NBR will then cancel the approval to use the domestic charge mechanism.
  3. The authority will send a notification to the taxable person stating the date of cancellation.

End Note

Now that we have come to the end of this article, it's important to understand that the steps taken by the authorities have simplified tax systems for the users. It has reduced tax fraud and made the Bahrain VAT law easy to follow. This also helps in making tax compliance user-friendly and ensures a true and fair view of the VAT system.

However, it is beneficial to reach out to a consultancy firm like Commitbiz because we provide the best quality services and will make sure that the requirements are met. Begin our journey with us!

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Which article comprises the domestic reverse charge mechanism in Bahrain?

Article 66. 

When will the VAT incurred will not be recovered?

VAT incurred on non-business expenditures should not be recoverable, such as entertainment and personal expenses.

Would the increase in the VAT rate affect the zero-rated and exempted categories in Bahrain?


Who can apply for the reverse charge mechanism under the NBR VAT Bahrain?

The registered businesses engaged in ‘Intra-GCC Supplies, or Exports of Goods’ can apply for the mechanism.

Why was the domestic reverse charge introduced in the Kingdom of Bahrain?

The domestic reverse charge was introduced in Bahrain VAT to diminish the exporters’ risk regarding the potential cash flow impact.