A taxable person in Bahrain may deduct input tax borne on goods and services supplied to it or imported by it, provided this tax relates to taxable supplies, and provided it has received and retained the tax invoice or customs documents evidencing this.
Deductible Tax
Article (42) of the Value Added Tax Law defines deductible tax, stating:
The tax deductible by the Taxable Person for any tax period is the total of the input tax paid or due on goods and services supplied to it or imported by it for the purpose of carrying out the following transactions: 1- Taxable supplies.
The second paragraph of the same article adds supplies made outside the Kingdom where they are taxable in that other state, and also allows deduction of tax paid on import through another implementing state that is the first point of entry, where the Kingdom is the final destination of the goods.
Cases Where Deduction Is Not Allowed
Paragraph (c) of Article (42) excludes cases in which input tax may not be deducted, stating:
Input tax borne may not be deducted in the following cases: 1- If it was paid on goods or services allocated for purposes other than the Taxable Person's economic activity. 2- If it was paid on goods prohibited from circulation in the Kingdom. 3- If it was paid on import or supply transactions exempt from tax in the Kingdom.
The Documentation Requirement
Article (43) of the Law requires supporting documentation for the right of deduction, stating:
Deducting input tax for any tax period requires the Taxable Person to receive and retain the Tax Invoice or customs documents proving that it is the importer of the goods related to the supply or import on which input tax became due.
Deducting Tax Paid Before Registration
Article (44) allows a taxable person to deduct input tax paid on goods and services it received or imported before its registration date, through the tax return for the first tax period after registration, subject to a set of conditions, including:
A Taxable Person may deduct input tax on goods and services supplied to it or that it imported before the registration date, under the tax return for the first tax period after registration, if the following conditions are met: 1- The goods or services were received for the purpose of making taxable supplies. 2- The goods were not supplied before the registration date.
Other conditions added by the text include that capital assets not have been fully consumed before the registration date, and that the services subject to deduction have been received within a period not exceeding six months preceding the registration date.
Proportional Deduction
Where input tax relates to goods or services used simultaneously for taxable and non-taxable supplies, the taxable person may deduct it only to the extent of the proportion attributable to the taxable supplies, and the Executive Regulation sets out the method for calculating this proportion.
Legal References
- Legislative Decree No. (48) of 2018 Promulgating the Value Added Tax Law — Articles (42), (43), (44) and (45)
For questions about your specific situation, you can ask the Bahrain Tax & Legislation Helper on Helpers, or consult a licensed chartered accountant.