Bahrain’s Value Added Tax (VAT) has been raised from 5% to 10%, leading to the country having one of the highest VAT rates in the Gulf. This hike is effective from January 1, 2022 for all supplies and imports, and has been enacted in order to grow government revenue and end the budget deficit.

This guide will explain what this hike means for Bahrain businesses and highlight the transitional provisions that come under this hike, with a few examples to make it easier to understand.

• What is the purpose of the VAT hike?
• The impact of the VAT hike on domestic supplies and imports
• Transitional provisions for the VAT hike
• Transitional Rule 1 for one-off supplies
• Transitional Rule 2 for one-off supplies
• Transitional Rule 3 for continuous supplies
• Transitional Rule 4 for continuous supplies
• What constitutes a change in the contract?

What is the purpose of the VAT hike?

To reduce further expenditure and to re-stabilize the country’s budget by 2024, the National Bureau for Revenue (NBR) has increased the VAT rate to 10%. The government aims to expand the economy, with a larger goal of moving towards fiscal reform and balanced financial growth.

The impact of the VAT hike on domestic supplies and imports

Standard-rated supplies are those goods and services that are supplied in Bahrain. Here, VAT of 5% will apply for supplies made before January 1, 2022. From January 1, 2022, the VAT rate will be 10%.

VAT-exempt supplies and zero-rated supplies will remain unaffected by the VAT hike.

This VAT hike of 10% affects imports of goods and services too. A VAT rate of 5% will apply for imports before January 1, 2022. From January 1, suppliers registered for VAT must apply 10% VAT under the reverse charge mechanism to imports of services.

Transitional provisions for the VAT hike

With this VAT rate change, there will be a transition period of one year, from January 1, 2022 to December 31, 2022. During this time, there will be some transitional provisions that will apply, and suppliers will continue to charge 5% VAT on supplies, provided that certain conditions (explained below) are followed. After this transition period, 10% VAT will apply as the norm.

There are two major dates related to the transitional provisions.

• December 24, 2021: The law enforcement date mentioned in the amended VAT law
• January 1, 2022: The date from which the VAT rate change is effective

Transitional rule 1 for one-off supplies

A one-off supply refers to a supply of standard-rated goods or services made at a single point in time, which isn’t a continuous supply.

In the first transitional provision, if you, as a supplier, have entered a contract for one-off supplies before December 24, 2021, your supplies made during the transition period will have a VAT rate of 5% (unless the contract is amended before you’ve made the supply).

This VAT rate of 5% is applicable even if the supply is made on or after January 1, 2022. So, if you have entered a contract for one-off supplies before December 24, 2021, you can apply 5% VAT if the actual supply takes place any time after that (whether it happens before January 1, 2022 or after).

However, this transitional rule won’t apply if the contract has been changed before you’ve made the supply. In this case, 10% VAT will have to be applied to the supplies.

For instance, let’s say that ABC Electronics, a VAT-registered business in Bahrain, has signed a contract on November 28, 2021 to supply a home theatre set to a customer. The complete set is supplied on January 12, 2022. If the contract hasn’t been changed before the supply is made, only 5% VAT will apply for this sale.

Transitional rule 2 for one-off supplies

This transitional provision applies to contracts for one-off supplies that have been made from December 24, 2021.

In this case, your supplies will have a VAT rate of 10% from January 1, 2022. If you issue a VAT invoice or receive payment before January 1, 2022 for supplies to be made on or after January 1, 2022, a VAT rate of 10% will be applicable. You should issue a VAT invoice showing this rate by the 15th day of the month following when you received payment. For instance, if you have received payment on December 29, 2021, you should issue a tax invoice with 10% VAT by January 15, 2022. You will have to account for this in your December 2021 return as well.

In case you have issued a VAT invoice before January 1, 2022, accounting for only 5% VAT, you should cancel the invoice and issue a new one displaying 10% VAT before the 15th. While you’re filing your VAT return for this period, you should correct the details accordingly by excluding the previous VAT invoice from the return, and adding the details of the newly issued return.

Note: An additional invoice or debit note can’t be issued to make up for the VAT rate difference. A completely new invoice should be issued.

Let’s take an example of MJ Boutique, a VAT-registered business that has signed a contract on December 29, 2021 to supply a customized suit for a client’s wedding. This product will reach the client only by February 15, 2022. For this purpose, MJ Boutique issues a VAT invoice with 10% VAT to the client, as the contract was made after December 24, 2021 for a supply that will take place after January 1, 2022.

On December 31, 2021, they make yet another contract with a customer who pays 50% of the amount on that day, for a suit to be delivered only on January 17, 2022. This time, as well, MJ Boutique should account for 10% VAT on the amount they have received so far, and should declare this in their December 2021 return. Once this is done, they should issue a VAT invoice by January 15, 2022 reflecting 10% VAT. Once the suit is delivered, a similar invoice (with 10% VAT) for the remaining 50% should be issued.

Transitional rule 3 for continuous supplies

Continuous supplies are those supplies of goods and services that happen on an ongoing basis, and are carried on for a period of time. Such supplies may involve the issuing of multiple invoices or periodic payments.

For such supplies, you may have entered into a contract before December 24, 2021, but some or all of the supplies may actually happen only from January 1, 2022. In this situation, 5% VAT will apply for supplies delivered before January 1, 2022 until December 31, 2022. From January 1, 2023, 10% VAT will be applicable.

However, if the contract is amended, this transitional provision will not apply, and 10% VAT will be applicable for supplies delivered after the date of amendment. In case the contract is amended before January 1, 2022, 10% VAT will apply from January 1, 2022.

For instance, Farm Fresh Market has entered a two-year contract on July 15, 2021 to supply strawberries to a customer. They will apply 5% VAT for supplying strawberries until December 31, 2022, after which 10% VAT will apply. However, they change the contract midway through the year, on August 12, 2022, by extending it for another year. Due to this change, 10% VAT will apply from August 12.

For continuous supplies, you can issue a single tax invoice showing both 5% VAT (for portions of the supply made before January 1, 2022) and 10% VAT (for the remaining supplies after January 1, 2022). VAT for continuous supplies must be reported in the same month that you’ve issued the invoice in.

Transitional rule 4 for continuous supplies

This rule applies in situations where you have entered into a contract for continuous supplies from December 24, 2021, or you have entered into one before December 24 but it has been amended since (amended any time from that date till January 1, 2023).

For supplies made under these contracts, 5% VAT will apply on the value of supplies delivered before January 1, 2022, and 10% VAT will apply for those delivered from January 1, 2022. If the amendment takes place after January 1, 2022, 10% VAT is applicable on supplies delivered from the date of amendment.

Let’s take a scenario where Top Consultancy enters into a contract on December 27, 2021 to provide consultancy services to a customer for two years. Here, 5% VAT will apply from the date the contract was created until December 31, 2021, after which 10% VAT will apply.

However, if they had entered a contract on December 21, 2021 and then changed it on March 7, 2022, 5% VAT will apply until March 7, following which 10% VAT will apply.

For another example, let’s say the value of Top Consultancy’s services delivered before January 1, 2022 is BHD 2,000 and they haven’t issued an invoice yet. During January 2022, they deliver services worth BHD 10,000 and on February 1, 2022, they issue a VAT invoice for the total services provided so far. For this invoice, Top Consultancy has to apply 5% VAT on BHD 2,000 and 10% VAT on BHD 10,000. The invoice should display the VAT rate for each part of the supply and the actual VAT amounts at 5% and 10%. Top Consultancy will have to declare and pay the VAT in their VAT return for February 2022.

What constitutes a change in the contract?

Transitional provisions don’t apply to contract changes made on or after December 24, 2021. A change in contract includes:

• Extending the duration of the contract, so it can apply to additional supplies
• Changing the type of your supplies
• Including additional supplies in the existing contract
• Increasing the amount payable for supplies which would have otherwise qualified for 5% VAT under the transitional provisions.

Making a change in the delivery or payment method isn’t considered as a change in the contract and won’t impact the VAT rate or the value of your supplies under the contract.

Note: Even if you have a contract with a clause describing an increase in the VAT rate, transitional provisions will still apply.