Transitional Provisions | Implication of VAT on Contracts in Bahrain

Transitional Provisions under Bahrain VAT law. The VAT in Bahrain is implemented from 01st January 2019 onwards and it is being implemented in different stages.

Companies which are having a higher turnover VAT is implemented from 01st January 2019. Businesses having a higher turnover VAT will be effective from 01st January 2020.

Here, we have to learn if a company has entered into a contract in the year 2017 or 2018 and the project is running throughout the year 2019 or 2020.

How VAT will be applicable in the contracts signed prior to the VAT Registration?

If any invoice is made or payment is done against the supply and the actual supply is happening after VAT Registration, then it will be a taxable supply which means that just by making an invoice or making a payment prior to the VAT Registration we cannot avoid VAT.

Transitional Provisions can be explained with an example:

ABC WLL entered into a contract with XYZ WLL in the year 2018. The contract includes 5% VAT for the supply of goods and services once the supplier (ABC WLL) is registered for VAT in Bahrain. On 20th December 2018 XYZ WLL (customer) sent a Purchase Order to buy goods worth BHD 10,000/-. The customer paid an advance for such supplies. However, the actual supply of goods was done only on 10th January 2019. ABC WLL was registered under VAT in Bahrain by 1st January 2019.

As per the provisions of the Bahrain VAT law, the date of supply is earliest of tax invoice or payment or supply of goods. By considering this clause one cannot take the supply date as 20th December 2018. As per the transitional provisions of the Bahrain VAT Law, date of supply will be 01st January 2019 and hence tax is applicable for this transaction on 01st January 2019.

Another provision that we have to learn is that in this scenario if the contract is signed prior to the registration and the clause related to VAT in Bahrain is silent, it will be considered as inclusive of VAT and the supplier is losing from his profit margin. This means that suppose the contract is signed for Hundred Thousand BHD and nothing is mentioned about the VAT, in such cases, it means the contracts should be taken in such a way that VAT is inclusive under Hundred Thousand BHD.

Let us understand the above scenario with an example:

In the above example related to ABC WLL & XYZ WLL, assume that the VAT contract is silent on VAT in Bahrain. It still has to be considered as taxable supply though the contract is silent about the VAT clause. However, the supply has to be considered as inclusive of VAT i.e, BHD 10,000/- is inclusive of VAT. Hence the VAT amount is 476.19 BHD and the supply value is 9,523.81 BHD. In this case, the supply value is reduced by 5% and hence supplier will be loosing from his pocket.

The same clause will be applicable for companies registered for VAT in Bahrain after implementation of VAT in Bahrain i.e, 01st January 2019. For example: if the company EFG WLL is formed in Bahrain in November 2019. It reaches 37,500/- BHD by 30th June 2020. It will be getting a registration number for VAT from 1st July 2020. If it had signed any contract prior to its VAT Registration, it also has to be treated similar to the case of ABC WLL.

Please keep in mind and ensure that the VAT clause is always included in each and every contract which is signed with your customer, supplier & third parties wherever applicable. Another point which you have to consider is that, if the contract is signed with the government authority prior to the VAT implementation but the contract is silent about VAT it will be considered as zero-rated supplies. This will be applicable until the completion of such a contract or renewal of such a contract or till the end of the year 2023.

Please keep in mind from here onwards if you are signing in any contract make sure that the VAT clause is considered and specifically mentioned in the contract. This will help you to do better business in Bahrain. For more details visit Bahrain VAT official website

If you would like to learn Transitional Provisions Under the Bahrain VAT law through video, please go through it

Emirates Chartered Accountants Bahrain offers an exclusive range of VAT Services in the Kingdom of Bahrain. The Tax Department has practical experience of implementing VAT in Bahrain & VAT in UAE and are professionally well versed with the Bahrain VAT laws and its compliances.

Looking for VAT Services in Bahrain are:

For TAX Service in Bahrain 

Mr. Bichin

+973 3619 8998

For TAX Service in UAE

Mr. Navaneeth

+971 55 889 2750

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