The essential difference between zero-rated supplies and exempt supplies under Bahrain's Value Added Tax Law lies in the right to deduct input tax: zero-rated supplies remain taxable supplies in law, and the supplier retains the right to deduct related input tax, whereas exempt supplies are not taxable at all, and no right to deduct related input tax arises.
The Legal Definition of the Distinction
Article (1) of the Value Added Tax Law establishes this distinction in its definitions of taxable supplies and exempt supplies:
Taxable Supplies: Supplies on which tax is imposed, whether at the standard rate or at a zero rate, and for which related input tax is deducted, in accordance with the provisions of this Law.
By contrast, the same article defines exempt supplies as follows:
Supplies Exempt from Tax: Supplies on which tax is not imposed, and for which related input tax is not deducted, in accordance with the provisions of this Law.
Key Zero-Rated Supplies
Article (53) of the Law lists transactions subject to the zero rate, including:
The zero rate shall apply to the following transactions: 1- The export of goods outside the territory of the Implementing States. 2- The supply of goods into a customs duty-suspension situation
The article also adds the supply of preventive and basic healthcare services and of medicines and medical equipment:
4- The supply of preventive and basic healthcare services and related goods and services. 5- The supply or import of medicines and medical equipment
The list also includes education services at various stages, the local transport sector, the oil, petroleum-derivatives and gas sector, the construction of new buildings, and the supply of certain foodstuffs specified in the Unified Agreement. One notable case is the supply or import of investment-grade precious metals of high purity:
8- The supply or import of investment gold, silver and platinum, if of a purity of not less than (99%) and tradable in the global bullion market, based on a certificate issued by the authority responsible for examining metals and precious stones in the Kingdom.
Key Exempt Supplies
The Law devotes a separate chapter to exemptions, the most notable being financial services and real estate. Regarding financial services, Article (54) provides:
The supply of financial services determined by the Regulations shall be exempt from tax, except for amounts paid explicitly for the service as a fee, commission or trade discount.
Regarding real estate, Article (55) provides:
The supply of bare land and buildings, whether by sale or lease, shall be exempt from tax, and the Regulations shall set out the conditions and rules necessary for applying this article.
Why This Distinction Matters in Practice
This distinction directly affects a supplier's tax position. A supplier of zero-rated goods or services remains obliged to register and file returns like any taxable person, but can recover the input tax it bore on its costs. A supplier that makes only exempt supplies has no right to deduct the input tax it bore in relation to those supplies, and this cost may be reflected in its final price.
Legal References
- Legislative Decree No. (48) of 2018 Promulgating the Value Added Tax Law — Article (1) items (21) and (23), and Articles (53), (54) and (55)
For questions about your specific situation, you can ask the Bahrain Tax & Legislation Helper on Helpers, or consult a licensed chartered accountant.