Introduction
This clarification sets out the position of the National Bureau for Revenue (NBR) on the VAT treatment to be applied on amounts claimed by a Bahraini dealer from a manufacturer for the cost of repair services undertaken on faulty goods sold by the manufacturer to a Bahraini dealer for onward supply to his customers where the repair services are covered by a manufacturer's warranty.
General Overview
VAT is levied on supplies of goods and services which are VATable supplies for VAT purposes. The question whether a payment is consideration for a supply is factual and requires the VAT payer to consider the underlying contractual arrangements that give rise to the payment in order to determine whether the payee has provided anything in return for the payment.
Warranty repair services
A manufacturer's warranty usually covers the reliability of the goods for a specified period while they are expected to be mechanically sound.
Where goods under warranty are faulty, repairs are often carried out by a dealer on behalf of the manufacturer as part of the after sales service to the customer. The dealer will then seek reimbursement from the manufacturer of the cost of repairs undertaken. Such costs include labor and the cost of any spare parts used.
Repair services provided by the dealer to the customer during the warranty period
As the dealer has a contractual obligation to rectify any defaults identified during the warranty period, a repair service provided by a dealer to a customer is outside the scope of Bahrain VAT. Therefore, the dealer should not charge VAT to the customer on the warranty repair.
Reimbursement of repairs costs paid to the dealer from the manufacturer during the warranty period
When, on behalf of a manufacturer, a dealer undertakes necessary repair services for goods which are under warranty, the dealer will subsequently request the manufacturer to reimburse him for the costs incurred in repairing the goods. NBR considers that warranty repair services are not separate supplies for VAT purposes where VAT has previously been paid on the warranty issued when the goods were sold. This applies where the cost of the warranty forms an integral component cost element of the sales price of the goods:
From the manufacturer to the dealer, and thereafter
From the dealer to the customer.