Following the newly published Law No. 33 for the year 2021, the National Bureau for Revenue (NBR), the government entity responsible for implementing and collecting VAT in Bahrain, has issued a VAT Rate Change Transitional Provisions Guide, which amends some provisions of the VAT Law issued by Decree-Law No. 48 for the year 2018 under which VAT was first introduced in the Kingdom.
Value-added Tax (VAT) is a tax that is indirectly imposed on a specific group of goods and services that businesses sell and buy. It is applied to every stage of the supply chain, from production to the final sale of the good or service. The final consumer pays value-added when purchasing any goods or services subject to value-added. In turn, the companies pay the VAT collected from the final consumer to the National Revenue Authority and recover the value-added that was paid to their suppliers.
Under the new rule, with effect from 1 January 2022, VAT has been increased to 10% from the previous rate of 5% on standard rated supplies in Bahrain.
The new rule would not affect articles subject to the zero-rate, such as essential food items, new constructions, oil and gas, education, and health, or articles generally exempt from VAT, such as certain financial services and real estate. Around 1,820 government services are also exempted from VAT.
The readiness of a business for VAT depends on its size and the amount of its annual supplies. NBR provides readiness steps for small, medium (Small & Medium Enterprises are those that have annual VAT-able supplies amounting to upto 3 million Bahraini Dinars) and large businesses (a business having annual VAT-able supplies of more than 3 million Bahraini Dinars).
According to the Transitional Guidance, the supplier must account for 10% VAT on full or partial payments received on or before December 31, 2021, in the December 2021 VAT return. By the 15th of January 2022, the seller must produce a tax invoice with a 10% VAT rate. The step might be difficult for retailers as their systems might not be ready for the transition this soon.
For example, an equipment supplier signing a contract with a customer on 27 December 2021 needs to issue a tax invoice with 10% VAT and account for VAT at 10% in their December 2021 return. NBR’s Transitional Guidance further stipulates that invoices with a 5% VAT rate must be cancelled and reissued with a 10% VAT rate before January 15, 2022. It appears that a firm cannot issue an extra invoice/debit note for the difference in VAT when an invoice is provided with 5% VAT.
In case of non-compliance with the Law, a business could face punishments that may reach up to five years and/or fines equivalent to thrice the evaded VAT. According to the estimates by S& P Global Ratings, the VAT increase could raise receipts from 1.7% of GDP in 2021 to about 3% in the next few years.
Source: Bahrain News Agency/KPMG / Gulf News
