Following the issuance of Law No. 33 of 2021 amending some provisions of the Value Added Tax (VAT) Law (the Law) promulgated by Legislative Decree No. 48 of 2018 in December 2021, the National Bureau for Revenue (NBR) has issued a transitional guide (the Guide) to better aid businesses in understanding how and when to apply changes in VAT rates.
The law prescribed to increase the rate of VAT in Bahrain from 5% to 10%, effective 1 January 2022 (the Effective Date). The key dates to keep in mind are 24 December 2021, the date on which the law was published in the Official Gazette (the Enforcement Date) and the Effective Date.
As a general rule, contracts for supply of goods or services entered into before the Effective Date should apply the standard rate of 5% VAT, and those entered into after the Effective date should apply the new rate of 10% VAT. However, the NBR has provided four rules, set out below, to be followed to assist in this transitional period.
Transitional Rule 1: Contracts for one-off supplies entered into before the Enforcement Date where the date of supply is on or after the Effective Date
For contracts described under Transitional Rule 1, 5% VAT will apply, even if supply of goods or services is made after the Effective Date. However, if amendments are made to the contract or if goods or services are supplied after 1 January 2023, then 10% VAT will apply. The NBR's guidance on contract amendments is set out below.
Transitional Rule 2: Contracts for one-off supplies entered into after Enforcement Date where the date of supply is on or after the Effective Date
For contracts described under Transitional Rule 2, 10% VAT will apply, even where an invoice is issued, or consideration is received, before the Effective Date.
Transitional Rule 3: Contracts for Continuous Supplies entered into before Enforcement Date where some or all of the supply occurs on or after the Effective Date
Under Transitional Rule 3:
- VAT at 5% will apply where goods or services are delivered before the Effective Date;
- VAT at 5% continues to apply where goods or services are delivered after the Effective Date and before 1 January 2023; and
- VAT at 10% will apply where goods or services are delivered after 1 January 2023.
It should be kept in mind that, if a contract expires and is renewed before 1 January 2023, then Transitional Rule 4 will apply. In addition, if a contract is amended or renewed after the Enforcement Date, Transitional Rule 4 will apply.
Transitional Rule 4: Continuous supply contracts entered into before the Effective Date where Transitional Rule 3 does not apply
Transitional Rule 4 is applicable to contracts for continuous supply which cover a period including the Effective Date and which were entered into:
- On or after the Enforcement Date (Scenario 1); or
- Before the Enforcement Date but which have been changed or amended on or after that date, but before 1 January 2023 (Scenario 2).
Under Transitional Rule 4:
- VAT at 5% will apply on the value of goods and services delivered before the Effective Date;
- VAT at 10% will apply on the value of goods and services delivered on or after the Effective Date for contracts under Scenario 1, and contracts under Scenario 2 where amendments to the contract have been made before the Effective Date; and
- VAT at 10% will apply on the value of goods and services delivered for contracts under Scenario 2 where amendments are made after the Effective Date, from the date the contract is amended.
Amendments to contracts
Under the NBR's transitional rules, a contract will be regarded as having been amended where a change to the contract terms results in the supplies or consideration being subject to VAT at 5% instead of 10%. This includes, but is not limited to, extending the duration of the contract, or including additional goods or services within the terms of the contract.
Other changes which do not impact the original timing, consideration, or quantum of supplies to be made, will generally not be regarded as an amendment for the purposes of the transitional rules.
The full guide can be found on the NBR's website.
