With the implementation of the value-added tax (VAT) law in a region that used to enjoy a VAT free environment, some businesses in the GCC have raised fundamental questions about its provisions as they navigate through the impact and comply with the relatively new taxation system. There are understandably many queries. In Bahrain, where the law is being implemented in different stages beginning the 1st of January 2019, two of the main commonly asked questions are: is VAT going to be a cost to my business and how can I apply VAT for the contract signed before my registration? Contrary to popular belief, VAT is generally structured in such a way that it would not become an additional cost to businesses. This can be achieved if a company meets certain conditions.
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The first involves businesses that need to account acquire supplies or services that fall within the law’s exempted category. Examples of these are the sale of bare lands or certain financial activities such as banking transactions. Under the law, companies cannot recover the expenses or payments they incur for acquiring supplies or services under the exempted category. These include payments to suppliers. Luckily in Bahrain, there’s a limited number of categories of exempted supplies. Second is the failure to meet the mandated VAT registration deadline. Businesses required to register under the VAT regime but fail to do so within the given timeframe should pay the corresponding penalties and fees for non-compliance.
The third scenario involves any expense incurred before a company’s VAT registration. For example, if a firm that is yet to register but needs to pay VAT for the goods bought, the payment can no longer be recovered as per the law’s provisions, provided, such goods are not used for taxable supplies.
The fifth is the cost incurred for training people and infrastructure development. Looking at it from a different angle, however, these expenses can be considered as long-term investments rather than additional costs. Human capacity development is necessary to help bring the business to new heights, while infrastructure development, including software integration, streamlines company operations and enhances overall efficiency and productivity.
As for the second query, VAT implications on contracts, let us focus on deals entered before VAT implementation and are still in effect after the VAT rollout. If invoices are made or payment is done against the supply and the actual delivery of that supply takes place after the registration, it is still considered a taxable supply. That means, under Bahrain’s VAT law, a company cannot avoid VAT just by making an invoice or making a payment before its registration.
Another important provision that businesses should keep in mind involves contracts signed before a company’s VAT registration but is silent on the new law. Suppose the contract is signed for BD 100,000 and nothing is mentioned about VAT. Businesses should take it in such a way that VAT is inclusive of the total amount. To avoid confusion and misunderstanding, it is important to include a VAT clause in their agreements.
This will be applicable until the completion of such a contract, or renewal, or until the end of 2023. If businesses are entering into agreements, the deals should include a VAT clause to help companies do their business better.
The VAT system might seem complex., but through the help of tax experts and available automated solutions, the law can easily be simplified for compliance purposes.
This article is written by CA Manu Nair, as a part of Tally’s VAT knowledge series ‘Let’s Talk VAT’
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