VAT treatment on adjustments made to the consideration

On the sale of a product or service which is subject to VAT at 5% as per the Bahrain VAT Law, the VAT payer will need to identify the value on which VAT rate at 5% is to be applied. The remuneration received against a supply on which the VAT rate is applied is known as the “value of supply”.

The “Value of supply” together with the VAT charged on the supply is known as the “consideration” for the supply.

What is the general valuation of the rule for the value of supply?

As a general rule, the value of supply under Bahrain VAT includes everything that a taxable supplier receives from his client for the supply given to the client. Therefore, the value of supply includes everything received from the client whether in cash or in kind. The value of remuneration received in-kind would be taxable at its fair market value.

The supplier must include all the costs or expenses imposed on the client while calculating the value of supply. That is any transportation cost, insurance costs, administration charges, taxes, or duties except VAT imposed on the client.

For a better understanding of the value of supply please refer to our blog Value of supply under Bahrain VAT:

Let us discuss the adjustments to the consideration after the date of the sale of goods or service to the customer.

What are the adjustments made to the supply as per the Bahrain VAT Law?

A taxable person is obliged to make adjustments to the value of supply when either of the following events occur after the date on which the supply is made:

1. 1. The customer cancels or refuses the goods or service sold (either fully or partly)
   2. The supplier provides a discount to the customer after the date of sale.
   3. The customer returns the goods to the supplier and the supplier accepts such return.
   4. The customer has not paid the consideration within 12 months from the date of supply and the procedure for “bad debt relief” has been followed (explained below).

Also, a taxable person must adjust any Output VAT that was charged wrongly on the supply.

Whenever the taxable person has made any of the above adjustments to the consideration, then he must issue a credit note or debit note for adjusting the value of supply.

How to account for rebate given after the sale of goods as per the Bahrain VAT Law?

Rebates are retrospective discounts on the price paid for the goods or service. The suppliers of goods or service often provide rebates to the customers if they meet certain condition such as:

1. 1. The total number of purchases made by the specific customer exceeds a certain amount. OR
   2. Additional discounts may be provided if certain products are sold within a time frame.

When rebates are allowed to the customer, the supplier must issue a Tax credit note to the customer. This is done in order to adjust the consideration.

In case the supplier is located outside Bahrain then such rebates will not have any VAT implication unless the customs value of the goods is adjusted.

Sometimes, the suppliers provide free goods or services whose value is equivalent to the rebates granted. In such a case, the supplier should issue a normal tax invoice against the goods provided and a tax credit note to adjust the value of the rebate.

WHAT IS BAD DEBT RELIEF AS PER THE BAHRAIN VAT LAW?

Bad debts are irrecoverable receivables. Sometimes, the customer might not pay off the receivable to the supplier. However, the supplier should have already accounted for the Output VAT on the supply and made payment to the National Bureau for Revenue in the relevant VAT period on which the supply is made.

However, as per the Bahrain VAT Law and executive regulation, the supplier can recover the Output VAT already paid to the National Bureau for Revenue provided the following conditions are met:

1. 1. The payment is due to be received at least for a period of 12 months from the date of supply or the customer should have been declared bankrupt whichever is earliest.
   2. The supplier should have taken all the necessary steps (follow up for payment through emails, phone calls, notification for payments, registered letters, etc.) to recover the amount due from the customer. He should have raised legal proceedings against the customer.
   3. The supplier should have written off the receivables as bad debt in his books.

The supplier has the right to adjust the related VAT amount in the VAT return during the VAT period in which he meets all of the above conditions. Also, the supplier should issue a Tax credit note to the customer showing the adjustment to the consideration.

However, there may be cases in which the supplier receives the amount written off as bad debts after making the above adjustment. In this case, the supplier should issue a Tax debit note against the amount received and pay the output VAT due. This should be done in the VAT return filed during the period in which the late payment was received.

WHAT ARE THE REQUIREMENTS OF A TAX CREDIT NOTE OR TAX DEBIT NOTE AS PER THE BAHRAIN VAT LAW?

We have learned from the above that whenever an adjustment is made to the consideration the supplier is obliged to issue a tax credit note or a tax debit note. The said document should meet the following conditions:

1. 1. The words “Credit Note” or “Debit Note” clearly stated.
   2. The name, address, and Tax Registration Number of the Supplier as per the VAT registration Certificate.
   3. The name and address of the Customer, as per their VAT registration certificate (in case the customer is registered for VAT).
   4. A sequential Credit or Debit Note number.
   5. The date of issue of the Credit or Debit Note.
   6. The number of the original Tax Invoice or original document is subject to the adjustment.
   7. The adjusted value of the goods or service and the VAT amount to be adjusted in BHD.

Our Tax Experts in Emirates Chartered Accountants Group Bahrain believe in a proactive approach to tax advisory services with a cost-effective and tailor-made option that is preferred by businesses all over. Our team of professionals is well versed with the Bahrain VAT Law as well as the UAE VAT Law  They are also equipped with practical experience of implementing VAT in UAE and VAT in Bahrain.

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• VAT Registration
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